A client owns a rental house leased at its market rent of $2,800 per month and asks an appraiser to analyze a $25,000 kitchen remodel that would raise market rent to $2,950 per month. Similar rental houses, remodeled or not, sell at a monthly gross rent multiplier of 215. What is the indicated value as remodeled, net of the remodel cost?
Correct Answer
C) $609,250
The as-remodeled indication is $2,950 × 215 = $634,250, and subtracting the $25,000 cost leaves $609,250. Stopping at $634,250 omits the cost. The figure of $602,000 is the as-is value at $2,800 × 215, and $577,000 subtracts the cost from that as-is value, charging for the work without crediting the higher rent. Because $609,250 exceeds $602,000, the work adds $7,250 under these assumptions.
Why This Is the Correct Answer
Option C is correct because the higher market rent is capitalized by the multiplier and the cost is then deducted: $2,950 × 215 = $634,250, and $634,250 − $25,000 = $609,250. This is $7,250 above the as-is value of $602,000.
Why the Other Options Are Wrong
Option A: $577,000
Option A, $577,000, starts from the as-is value of $2,800 × 215 = $602,000 and then subtracts $25,000. It charges for the remodel but gives no credit for the higher rent; the correct figure is $634,250 − $25,000 = $609,250.
Option B: $602,000
Option B, $602,000, is the as-is value, $2,800 × 215. It leaves out both the rent increase and the cost, while the client asked for $2,950 × 215 − $25,000 = $609,250.
Option D: $634,250
Option D, $634,250, is the as-remodeled indication, $2,950 × 215, before the cost. The client asked for the figure net of the $25,000 remodel, which is $609,250.
New Rent, Then Subtract Cost
Run the new rent through the multiplier first, subtract the cost once, then compare the result with the as-is value.
How to use: Use this order whenever you are asked whether an improvement pays for itself.
Exam Tip
Determine whether the client wants the gross indication, the net indication or the gain. All three can appear among the answer choices.
Common Mistakes to Avoid
- -Forgetting to subtract the improvement cost
- -Subtracting the cost from the as-is value
- -Treating the improvement cost as equal to the value it adds
Concept Deep Dive
Analysis
This is a before-and-after use of a multiplier. The new rent drives the as-remodeled indication, and the cost is then subtracted once. Comparing the net figure with the as-is value shows whether the rent increase pays for the work.
Background Knowledge
A gross multiplier converts rent into a value indication, so a change in supportable rent implies a change in value. Comparing that change with the cost is a basic feasibility test for an improvement. The result here assumes that the multiplier stays the same after the work.
Real-World Application
An owner considering a kitchen remodel asks whether the work pays for itself. Using supported market rents and a multiplier from similar sales, the appraiser shows the as-remodeled indication net of cost compared with the as-is value.
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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An appraiser is estimating the replacement allowance for a warehouse with effective gross income of $190,000 and other expenses, including property taxes, of $80,000. The short-lived components are roof covering costing $48,000 with a 20-year life, HVAC equipment costing $60,000 with a 15-year life, and paving costing $30,000 with a 10-year life. What is the net operating income after a straight-line replacement allowance?
Next Question
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?