The subject property is a 50-year-old rental house with market rent of $2,300 per month. The only recent sales of rental houses in the market area involve houses built within the past 10 years, which rent for about the same amount and indicate a monthly gross rent multiplier of 210. How is applying 210 to the subject's rent most likely to affect the value indication?
Correct Answer
C) It is likely to overstate value because rent ignores higher upkeep and shorter life
A gross rent multiplier assumes the sales and the subject share similar expenses and remaining lives, because gross rent shows neither. A buyer of a 50-year-old house typically expects higher upkeep and a shorter period of income than a buyer of a newer house at the same rent, and pays less per dollar of rent. Applying the newer houses' 210 therefore tends to overstate the subject's value. The subject's rent is already a market figure, so the problem lies in the multiplier, not the rent.
Why This Is the Correct Answer
Option C is correct because gross rent does not show an older house's higher upkeep or the shorter remaining life of its improvements. Buyers typically pay less per dollar of rent for such a house, so a multiplier from newer houses is likely to overstate the subject's value.
Why the Other Options Are Wrong
Option A: It should be reliable because equal rents show that buyers treat the houses alike
Option A says equal rents show that buyers treat the houses alike. Tenants set rent based on use, while buyers also weigh upkeep and how long the income will last, so equal rent does not make the 210 multiplier reliable for a much older house.
Option B: It is likely to overstate value because the subject's market rent is too high for its age
Option B has the right direction but the wrong reason. The $2,300 is stated as the subject's market rent, so the rent is not too high; the problem is that the 210 multiplier comes from newer houses.
Option D: It is likely to understate value because the subject earns the same rent despite its age
Option D treats the same rent despite age as a reason value would be understated. Rent matching a newer house's rent does not offset higher upkeep and a shorter remaining life, so 210 tends to overstate, not understate, value.
Rent Hides the Roof
Gross rent looks the same whether the roof is new or old. The multiplier from newer houses assumes costs and remaining life the older house does not have.
How to use: Use the phrase to ask what lies below the rent line before applying a gross multiplier across different ages.
Exam Tip
Ask whether a difference between the sales and the subject would show up in rent. If it would not, the gross multiplier itself needs attention.
Common Mistakes to Avoid
- -Assuming equal rents mean equal investment quality
- -Blaming the rent estimate when the multiplier is what does not transfer
- -Treating a gross multiplier as if it reflected expenses the sales do not share with the subject
Concept Deep Dive
Analysis
A gross multiplier stops at the rent line, so anything below that line has to be similar between the sales and the subject for the multiplier to transfer. Age affects two things the rent does not show: operating and repair costs, and how long the improvements will keep contributing income. The candidate must see that equal rents do not make equal investments.
Background Knowledge
Income multipliers and overall rates must come from sales comparable in use, remaining lives, condition and income streams. Remaining economic life is the period over which improvements can be expected to contribute to value. A gross multiplier carries these differences only implicitly, through the prices of the sales.
Real-World Application
An appraiser finds only newer rental houses among recent sales for a subject from an older neighborhood. The appraiser cautions that the multiplier may overstate value and gives more attention to other evidence in reconciling.
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A property has annual potential base rent of $92,000 and additional potential percentage rent of $8,000. Combined vacancy and collection loss is 5% of their total, and all property expenses are $17,000. No other deductions apply. Using a 10% overall rate, what value is indicated?