Comparable sales analyzed on annual NOI indicate a price-to-income multiplier of 12.5. The subject's annual NOI is $72,000. What value does the multiplier indicate?
Correct Answer
D) $900,000
72000×12.5 = 900000. Common errors: treating the annual income as monthly gives $75,000; dividing by the multiplier instead of multiplying gives $5,760; misplacing the decimal in the multiplier gives $90,000.
Why This Is the Correct Answer
Option D is correct because $72,000 × 12.5 = $900,000. The multiplier is based on the same annual NOI definition, so a straight multiplication gives the indicated value.
Why the Other Options Are Wrong
Option A: $5,760
Option A, $5,760, comes from $72,000 ÷ 12.5, dividing by the multiplier instead of multiplying. The value is $72,000 × 12.5 = $900,000.
Option B: $75,000
Option B, $75,000, comes from $72,000 × 12.5 ÷ 12, treating the annual income as if it needed a monthly conversion. The value is $72,000 × 12.5 = $900,000.
Option C: $90,000
Option C, $90,000, comes from $72,000 × 1.25, misplacing the decimal in the multiplier. The correct value is $72,000 × 12.5 = $900,000.
Multiplier multiplies
A multiplier is multiplied by income; a rate divides income.
How to use: Use this to decide which operation to apply when a factor is given.
Exam Tip
Value should be many times the annual income; an answer close to or below the income signals a division or conversion error.
Common Mistakes to Avoid
- -Dividing income by the multiplier
- -Converting annual income to monthly
- -Misplacing the decimal in the multiplier
Concept Deep Dive
Analysis
This question tests applying an annual NOI multiplier to annual NOI. Because the multiplier and income share the same definition and period, you multiply directly. The distractors come from dividing, from treating the income as monthly, or from misplacing the multiplier's decimal.
Background Knowledge
An income multiplier expresses value as a multiple of a defined income amount. A multiplier of 12.5 on NOI is the reciprocal of an 8% overall rate. The income must match the multiplier's definition and period.
Real-World Application
An appraiser has market evidence that similar properties trade at about 12.5 times annual NOI. She multiplies the subject's $72,000 NOI by 12.5 to obtain a $900,000 indication.
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