The subject property has an annual potential gross income (PGI) of $142,000. Sales of similar properties in the market area indicate a multiplier of 8.5, based on annual PGI. What is the indicated value of the subject?
Correct Answer
C) $1,207,000
142000×8.5 = 1207000. Common errors: dividing by the multiplier instead of multiplying gives $16,706; dividing the result by 12 as if a monthly figure were needed gives $100,583; annualizing income that is already annual (×12) gives $14,484,000.
Why This Is the Correct Answer
Option C is correct because $142,000 × 8.5 = $1,207,000. The income and the multiplier share the same definition and period, so the product is the indicated value.
Why the Other Options Are Wrong
Option A: $16,706
Option A, $16,706, comes from dividing by the multiplier: $142,000 ÷ 8.5 = $16,706. A multiplier is applied by multiplying, giving $142,000 × 8.5 = $1,207,000.
Option B: $100,583
Option B, $100,583, results from dividing the correct product by 12: $142,000 × 8.5 ÷ 12 = $100,583. The question asks for value, which is $142,000 × 8.5 = $1,207,000.
Option D: $14,484,000
Option D, $14,484,000, comes from treating annual income as monthly and multiplying by 12: $142,000 × 8.5 × 12 = $14,484,000. The PGI is already annual, so value is $142,000 × 8.5 = $1,207,000.
Multiply, don't divide
A multiplier gets multiplied: income times multiplier equals value, as long as income type and period match.
How to use: Use this reminder to avoid dividing by a multiplier under time pressure.
Exam Tip
Expect the answer to be several times larger than annual income when the multiplier is greater than 1; tiny results signal a division error.
Common Mistakes to Avoid
- -Dividing by the multiplier
- -Multiplying annual income by 12
- -Applying the multiplier to a different income measure
Concept Deep Dive
Analysis
This question tests applying an income multiplier to income on the same basis. The multiplier of 8.5 is stated to be based on annual PGI, so multiplying the subject's annual PGI by 8.5 gives value. No monthly or annual conversion is required.
Background Knowledge
Income multipliers are extracted by dividing sale prices by a specific income measure for a specific period. They must be applied to the subject's income on that same basis. Annual and monthly multipliers differ by roughly a factor of 12.
Real-World Application
An appraiser extracts an annual PGI multiplier from sales of rented duplexes and fourplexes. The subject's annual PGI is multiplied by that factor to produce an income-based value indication.
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?
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Previous Question
Annual potential base rent for a property is $85,000, and tenants also pay the landlord potential reimbursements of $15,000. A combined loss of 8% applies to both, and the reimbursements have not already been adjusted for loss. What is the annual EGI?
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Cash-equivalent sale price is $438,000 and matching monthly gross rent is $2,400. What monthly gross-rent multiplier is price ÷ monthly rent?