An appraiser is analyzing the cash sale of a fourplex for $645,000. At the time of sale, the buyer anticipated potential rental income of $60,000 per year and potential parking and laundry income of $4,500 per year, with vacancy and collection loss of 5%. What is the potential gross income multiplier indicated by this sale?
Correct Answer
A) 10.00
Potential gross income includes both sources before any loss: $60,000 + $4,500 = $64,500, and $645,000 ÷ $64,500 = 10.00. Using rent alone gives a rent multiplier of 10.75. Taking out the 5% loss first gives 10.53, which is an effective gross income multiplier. Subtracting the other income instead of adding it gives 11.62.
Why This Is the Correct Answer
Option A is correct because a gross income multiplier divides the cash-equivalent price by anticipated potential gross income, which here includes parking and laundry income. That income is $60,000 + $4,500 = $64,500, and $645,000 ÷ $64,500 = 10.00.
Why the Other Options Are Wrong
Option B: 10.53
Option B, 10.53, deducts the 5% loss first: $64,500 × 0.95 = $61,275, and $645,000 ÷ $61,275 = 10.53. That is an effective gross income multiplier; on potential gross income the result is $645,000 ÷ $64,500 = 10.00.
Option C: 10.75
Option C, 10.75, uses rent alone: $645,000 ÷ $60,000 = 10.75. That is a rent multiplier and leaves out the $4,500 of other income; the correct result is $645,000 ÷ $64,500 = 10.00.
Option D: 11.62
Option D, 11.62, subtracts the other income: $60,000 − $4,500 = $55,500, and $645,000 ÷ $55,500 = 11.62. Parking and laundry income adds to gross income, so the correct result is $645,000 ÷ $64,500 = 10.00.
All Sources, No Losses
Potential gross income means all real-property sources added together before vacancy and collection loss comes off.
How to use: Use this phrase to build the denominator when rent, other income and a loss rate are all given.
Exam Tip
Identify the multiplier's named basis before computing. A stated loss rate does not belong in a potential gross income denominator.
Common Mistakes to Avoid
- -Leaving other income out of a gross income multiplier
- -Deducting vacancy before calculating a potential gross income multiplier
- -Mixing rent-only and total-income multipliers across sales
Concept Deep Dive
Analysis
Three denominators look alike here: rent alone, potential gross income and effective gross income. The named multiplier decides which to use. Here it is potential income from all real-property sources, so other income goes in and the vacancy loss stays out.
Background Knowledge
Gross rent multipliers are common for small residential properties that have little non-rental income. When a property also earns income from other real-property sources, a multiplier based on total potential gross income fits it better.
Real-World Application
An appraiser analyzing a fourplex sale finds that parking and laundry income are a meaningful share of the property's gross. The appraiser extracts a gross income multiplier on total potential income and applies it to the subject's matching total.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
An appraiser is updating a prior appraisal of a triplex with potential gross income of $60,000 and no other income. The prior appraisal used vacancy and credit loss of 5% of PGI, and a new survey of competing rentals indicates 8%. The operating expenses of $24,000 are property taxes, insurance and contract services that do not vary with occupancy, and the market overall rate remains 7.5%. By what percentages do effective gross income and indicated value decrease?
Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
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Previous Question
An appraiser is estimating the market value of the fee simple interest in a four-unit apartment property. Each unit is leased at $1,050 per month, and similar units in competing properties rent for $1,200 per month. Stabilized vacancy and credit loss is 5% of PGI, market operating expenses are $19,720 a year, and the market overall rate is 8%. What is the indicated value?
Next Question
The subject property, a rental house leased at $2,400 per month, was listed at $528,000 and is under contract for $561,000. Its market rent is $2,550 per month. Sales of similar rental houses show monthly gross rent multipliers of 210 to 230, calculated on market rent. What multiplier does the contract price indicate, and how does it compare with the range?