The subject property is a rental house with no garage. A nearly identical house with a garage rents for $2,500 per month and recently sold for $630,000 in a cash transaction. Paired rentals show that a garage adds $150 to monthly rent. What is the subject’s indicated value using the gross rent multiplier from this sale?
Correct Answer
A) $592,200
The comparable has the garage and the subject does not, so the rent adjustment is downward: $2,500 − $150 = $2,350. The multiplier is $630,000 ÷ $2,500 = 252, and $2,350 × 252 = $592,200. Adjusting the wrong way gives $2,650 × 252 = $667,800. Ignoring the garage gives $630,000, and taking $1,800 × 12 = $21,600 off the price gives $608,400, which uses 12 in place of the annual multiplier of 21.
Why This Is the Correct Answer
Option A is correct because the comparable's rent is adjusted toward the subject and the multiplier is applied to the result. The subject's rent is $2,500 − $150 = $2,350. The multiplier is $630,000 ÷ $2,500 = 252, and $2,350 × 252 = $592,200.
Why the Other Options Are Wrong
Option B: $608,400
Option B, $608,400, annualizes the difference to $150 × 12 = $1,800 and then multiplies by 12 again: $1,800 × 12 = $21,600, and $630,000 − $21,600 = $608,400. The annual multiplier here is $630,000 ÷ $30,000 = 21, not 12, so the garage accounts for $1,800 × 21 = $37,800 and the right result is $592,200.
Option C: $630,000
Option C, $630,000, ignores the garage: $2,500 × 252 = $630,000. The subject lacks the garage, so its rent is $2,350 and the indication is $2,350 × 252 = $592,200.
Option D: $667,800
Option D, $667,800, adjusts rent the wrong way: $2,500 + $150 = $2,650, and $2,650 × 252 = $667,800. Because the comparable has the feature the subject lacks, its rent is adjusted down, which gives $2,350 × 252 = $592,200.
Comparable Better, Adjust Down
Adjust the comparable toward the subject: if the comparable has more, subtract; if it has less, add.
How to use: Use this rule when estimating a subject's market rent from a rental comparable.
Exam Tip
Derive the multiplier from the comparable's actual price and actual rent, then apply it to the subject's adjusted rent. Do not adjust the comparable's rent before extracting its multiplier.
Common Mistakes to Avoid
- -Adjusting the comparable's rent in the wrong direction
- -Multiplying an annualized rent difference by 12 rather than by the annual multiplier
- -Using the comparable's rent as the subject's market rent without adjustment
Concept Deep Dive
Analysis
The subject's rent is not given, so it has to be estimated first. The comparable is superior because of its garage, so its rent is adjusted down to reflect the subject. Only then is the multiplier applied, and the multiplier itself comes from the comparable's actual price and rent.
Background Knowledge
An income approach depends on a supported market rent as well as a supported multiplier. Market rent is commonly estimated by adjusting rental comparables for differences from the subject, using the same logic of adjusting the comparable toward the subject that sales analysis uses.
Real-World Application
An appraiser values a rental house without a garage using a nearby rental that has one. After supporting the garage's rent contribution from paired rentals, the appraiser adjusts the rent estimate before applying the multiplier.
More Income Approach Questions
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An appraiser has a rent roll for a fourplex that indicates potential gross income of $70,000, but no expense data. A similar fourplex recently sold for $450,000. That sale had potential gross income of $62,500, effective gross income of $56,250 and NOI of $36,000. What is the indicated value of the subject?