A cash-equivalent sale price is $1,500,000 and annual gross income is $125,000. What annual multiplier is price ÷ annual income?
Correct Answer
C) 12.0
1500000÷125000 = 12. Common errors: computing income ÷ price as a percentage instead of the multiplier gives 8.3; misplacing the decimal (dividing by 12,500) gives 120.0; misplacing the decimal (dividing by 1,250,000) gives 1.2.
Why This Is the Correct Answer
Option C is correct because $1,500,000 / $125,000 = 12.0. The multiplier is price divided by annual gross income, as the question states.
Why the Other Options Are Wrong
Option A: 1.2
Option A, 1.2, results from dividing by $1,250,000 instead of $125,000: $1,500,000 / $1,250,000. The correct divisor is $125,000, giving 12.0.
Option B: 8.3
Option B, 8.3, is $125,000 / $1,500,000 x 100, which is income as a percentage of price, not the multiplier. Price / income = $1,500,000 / $125,000 = 12.0.
Option D: 120.0
Option D, 120.0, results from dividing by $12,500 instead of $125,000: $1,500,000 / $12,500. The correct calculation is $1,500,000 / $125,000 = 12.0.
Price over income
A multiplier tells how many years of income the price represents, so price goes on top.
How to use: Use this to avoid inverting a GIM into an income rate.
Exam Tip
A sanity check helps: annual gross income multipliers for income property typically fall well above 1 and well below 100, so check decimal placement.
Common Mistakes to Avoid
- -Dividing income by price instead of price by income
- -Misplacing a decimal in the income figure
- -Mixing monthly and annual income bases
Concept Deep Dive
Analysis
This question tests extraction of a gross income multiplier from a comparable sale. The multiplier is sale price divided by annual income, a unitless figure that is later applied to the subject's income on the same basis.
Background Knowledge
A gross income multiplier relates sale price to gross income. It is extracted from comparable sales and must be applied to the same level and period of income from which it was derived, such as annual gross income.
Real-World Application
An appraiser extracts annual gross income multipliers from several recent sales of small commercial buildings, confirming each uses actual annual gross income. She then applies the reconciled multiplier to the subject's annual gross income.
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