The subject's annual PGI is $128,000. Sales in the market area indicate a price-to-income multiplier of 9.5, based on annual PGI. What is the indicated value?
Correct Answer
C) $1,216,000
128000×9.5 = 1216000. Common errors: dividing by the multiplier instead of multiplying gives $13,474; dividing the result by 12 as if a monthly figure were needed gives $101,333; annualizing income that is already annual (×12) gives $14,592,000.
Why This Is the Correct Answer
Option C is correct because value equals income times multiplier: $128,000 × 9.5 = $1,216,000. The multiplier and the income share the same definition (PGI) and period (annual), so no further conversion is required.
Why the Other Options Are Wrong
Option A: $13,474
Option A, $13,474, comes from dividing by the multiplier instead of multiplying: $128,000 ÷ 9.5 = $13,474. A multiplier is applied by multiplication, giving $128,000 × 9.5 = $1,216,000.
Option B: $101,333
Option B, $101,333, results from dividing the correct product by 12 as if a monthly figure were needed: $128,000 × 9.5 ÷ 12 = $101,333. The question asks for value, which is $128,000 × 9.5 = $1,216,000.
Option D: $14,592,000
Option D, $14,592,000, comes from annualizing income that is already annual: $128,000 × 9.5 × 12 = $14,592,000. The PGI is already an annual figure, so the value is $128,000 × 9.5 = $1,216,000.
Same income in, same income out
A multiplier only works on the income type and period it came from. Annual PGI multiplier times annual PGI equals value.
How to use: Use this check before multiplying any income figure by a GIM or GRM.
Exam Tip
Confirm the income period before multiplying; if income and multiplier are both annual, do not multiply or divide by 12.
Common Mistakes to Avoid
- -Dividing income by the multiplier instead of multiplying
- -Multiplying annual income by 12 as if it were monthly
- -Applying a PGI-based multiplier to EGI or NOI
Concept Deep Dive
Analysis
This question tests applying a gross income multiplier to income measured on the same basis from which the multiplier was derived. Because the multiplier of 9.5 is stated to be based on annual PGI, you simply multiply the subject's annual PGI by 9.5. No conversion between monthly and annual figures is needed.
Background Knowledge
A gross income multiplier is derived by dividing sale prices by the gross income of comparable properties. It must be applied to the same level and period of income from which it was derived, such as annual PGI. Mismatching income definitions or periods produces a distorted value.
Real-World Application
An appraiser has extracted an annual PGI multiplier from several apartment sales. The subject's rent roll supports a stabilized annual PGI, so the appraiser multiplies that figure by the multiplier to reach an income-approach indication.
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Previous Question
A client has contracted to buy a fourplex for $550,000 and hopes to earn a 10% cash-on-cash return on equity. A similar fourplex recently sold for $750,000 with annual NOI of $60,000. At the overall rate indicated by that sale, what annual NOI would the subject need to justify the contract price?
Next Question
The subject property is a fourplex with projected annual NOI of $55,000. A similar fourplex recently sold for $720,000. The seller's reported NOI of $60,000 included a one-time insurance recovery of $12,000 that the buyer did not expect to recur. What is the indicated value of the subject by direct capitalization?