An appraiser is analyzing a rental house listed for sale at $612,000. Three sales of similar rental houses indicate monthly gross rent multipliers of 144, 153 and 183, and the appraiser selects 153 because that sale is most like the subject. To the nearest dollar, what monthly market rent would justify the list price?
Correct Answer
C) $4,000
Value equals rent times the multiplier, so the required rent is $612,000 ÷ 153 = $4,000. Using the average of the three multipliers (160) gives $3,825. Using the highest multiplier (183) gives $3,344, and using the lowest (144) gives $4,250. Neither the average nor the extremes is the multiplier the appraiser selected.
Why This Is the Correct Answer
Option C is correct because the formula value = monthly rent × multiplier rearranges to monthly rent = value ÷ multiplier. The selected multiplier is 153, so $612,000 ÷ 153 = $4,000 a month. At that rent, the selected multiplier indicates the asking price exactly: $4,000 × 153 = $612,000.
Why the Other Options Are Wrong
Option A: $3,344
Option A, $3,344, comes from dividing by the highest multiplier: $612,000 ÷ 183 = $3,344. The appraiser selected 153, not 183, and the correct figure is $612,000 ÷ 153 = $4,000.
Option B: $3,825
Option B, $3,825, comes from averaging the sales, (144 + 153 + 183) ÷ 3 = 160, and then dividing: $612,000 ÷ 160 = $3,825. The average is not the selected multiplier, and the correct figure is $612,000 ÷ 153 = $4,000.
Option D: $4,250
Option D, $4,250, comes from dividing by the lowest multiplier: $612,000 ÷ 144 = $4,250. That would be the required rent only if 144 had been selected; at 153 the required rent is $4,000.
Cover the Unknown Term
Picture a triangle with value on top and rent and multiplier below. Cover the unknown: covering rent leaves value over multiplier.
How to use: Use the triangle whenever the price and multiplier are known and the income is not.
Exam Tip
When several multipliers are listed and one is selected, compute with the selected one. Check the answer by multiplying it back to the price.
Common Mistakes to Avoid
- -Averaging all the sale multipliers after one has been selected
- -Multiplying the price by the multiplier instead of dividing
- -Using the highest or lowest multiplier from the range
Concept Deep Dive
Analysis
This problem reverses the usual multiplier calculation: value is known and the income is the unknown. Because value equals monthly rent times the monthly multiplier, dividing the price by the multiplier gives the rent that would support it. The second task is using the multiplier the appraiser actually selected, not another figure from the sales.
Background Knowledge
A gross rent multiplier relates sale price to gross rent, so any one of the three terms can be found from the other two. Appraisers commonly review a range of sale multipliers and select the one or more best supported by the most similar sales.
Real-World Application
An investor asks whether a $612,000 asking price makes sense for a rental house. The appraiser's multiplier evidence shows the house would need about $4,000 a month in market rent to support that price, which can then be tested against rental comparables.
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Previous Question
The subject property has annual contract potential rent of $110,000, less a $10,000 free-rent concession. Combined vacancy and collection loss is 4% of the rent remaining after the concession, and annual property expenses total $16,000. The concession is not included in any other deduction. At a 10% overall rate, what is the indicated value?
Next Question
The subject property's annual EGI is $450,000. The operating expense ratio, excluding debt service, is 32% of EGI. Using a 7.5% overall capitalization rate, what is the indicated value?