An appraiser is valuing a rental house near a university. It rents for $3,000 per month during the nine-month academic year and $1,000 per month during the three summer months. A similar nearby rental house recently sold for $420,000. That house rents for $3,000 per month during the academic year and $2,200 per month during the summer. Operating expenses for the two houses are similar. What is the indicated value of the subject by gross income multiplier?
Correct Answer
C) $375,000
Because rent is not level, the multiplier has to rest on actual annual income. The sale earns $27,000 + $6,600 = $33,600, so its multiplier is $420,000 ÷ $33,600 = 12.5, and the subject's $30,000 annual income indicates $375,000. A monthly multiplier on academic-year rent (140) gives $420,000 because it hides the lower summer rent. Leaving out summer income gives $337,500, and a simple average of the two rents gives $300,000.
Why This Is the Correct Answer
Option C is correct because the sale earns $3,000 × 9 + $2,200 × 3 = $33,600, giving an annual multiplier of $420,000 ÷ $33,600 = 12.5. The subject earns $3,000 × 9 + $1,000 × 3 = $30,000. Applying the multiplier gives $30,000 × 12.5 = $375,000.
Why the Other Options Are Wrong
Option A: $300,000
Option A, $300,000, averages the two rents without weighting by months: ($3,000 + $1,000) ÷ 2 × 12 = $24,000, then × 12.5. The higher rent applies for nine months and the lower for three, so true annual income is $30,000, giving $375,000.
Option B: $337,500
Option B, $337,500, counts only academic-year rent: $27,000 × 12.5. It leaves out the $3,000 of summer income, which is part of the annual income the multiplier applies to. Including it gives $375,000.
Option D: $420,000
Option D, $420,000, derives a monthly multiplier from academic-year rent ($420,000 ÷ $3,000 = 140) and applies it to the subject's same $3,000. This treats the houses as equal, although the subject earns $3,600 less each year. The annual multiplier gives $375,000.
Uneven rent, count the year
If the rent changes during the year, add up the twelve months for each property. Compare prices to those annual totals.
How to use: Use this when a rental has seasonal, academic-year or other uneven rents.
Exam Tip
Check whether rent is level before using a monthly multiplier. If two rents appear, weight each by its number of months.
Common Mistakes to Avoid
- -Applying a monthly multiplier taken from peak-season rent
- -Averaging two rents without weighting by months
- -Leaving off-season rent out of annual income
Concept Deep Dive
Analysis
A monthly gross rent multiplier assumes twelve similar months. These houses have two rents each year, and they share an academic-year rent but differ in the summer, so a monthly figure would show them as equal when one earns $3,600 more a year. Building annual income for each house brings the summer difference into the multiplier and the value.
Background Knowledge
Gross income multipliers are derived by dividing adjusted sale prices by anticipated annual gross income, and they are applied to the same level of income. A monthly multiplier is a convenient form for houses with level rents. When rents vary through the year, annual income captures the pattern that a single month cannot.
Real-World Application
An appraiser values a house in a college town where summer demand is weak on some streets and strong on others. The appraiser derives multipliers from the sales' full-year rents, so that a location with weak summer demand is not valued like one with strong summer demand.
More Income Approach Questions
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Previous Question
Annual potential rent is $95,000. Apply 7% combined loss to rent only, then add $3,400 of other collectible real-estate income already stated after its losses. What EGI results?
Next Question
The subject property has monthly gross rent of $2,280. A rented comparable sold for a cash-equivalent price of $564,000 with monthly gross rent of $2,400. Sales in the market area indicate the same price-to-rent ratio applies to the subject, and no other adjustments are needed. What is the subject's indicated value, to the nearest dollar?