The subject property is a 120-unit apartment complex that earns parking, laundry and storage income in addition to rent. Sales of similar complexes show similar income mixes. Which measure should an appraiser developing a gross multiplier from these sales use?
Correct Answer
D) Gross income multiplier on total gross income
A gross income multiplier captures total gross income, which suits larger apartment projects that also earn income from parking, laundry or storage. A rent multiplier on annual rent leaves those sources out of the measure and is more typical of smaller residential properties. Adding a separate value for other income to a rent multiplier's result counts that income twice, because the sale prices already reflect it. A multiplier on rent and parking income still leaves out the laundry and storage receipts.
Why This Is the Correct Answer
Option D is correct because a gross income multiplier measures price against total gross income, including parking, laundry and storage receipts. That matches how these larger projects earn income, and it keeps the sales and the subject on the same basis.
Why the Other Options Are Wrong
Option A: Gross rent multiplier on annual rent
Option A, a gross rent multiplier on annual rent, leaves the complex's parking, laundry and storage income out of the measure. Those receipts are part of what buyers of these complexes pay for, so total gross income is the better basis.
Option B: Gross rent multiplier plus a separate value for other income
Option B, a gross rent multiplier plus a separate value for other income, counts that income twice. The sale prices behind the multiplier already reflect the parking, laundry and storage income of those complexes, so adding a separate value overstates the subject.
Option C: Gross income multiplier on rent and parking income
Option C, a gross income multiplier on rent and parking income, goes beyond rent but leaves out the laundry and storage receipts. The subject and the sales earn all three, so total gross income is the more complete basis.
More income sources, broader multiplier
Rent-only properties suit a rent multiplier. Once parking, laundry and storage appear, widen the denominator to total gross income.
How to use: Use this idea to choose between a gross rent multiplier and a gross income multiplier.
Exam Tip
Look at the property's size and income sources. They often signal which multiplier best fits.
Common Mistakes to Avoid
- -Treating parking and laundry receipts as outside real-estate income
- -Using a rent-only multiplier for a project with substantial other income
- -Adding a separate value for other income to a value from a rent multiplier
- -Counting some sources of other income and leaving out others
Concept Deep Dive
Analysis
The problem tests fit between a unit of comparison and the property's income profile. When sizable income comes from sources other than rent, a rent-only denominator misses part of what buyers are paying for. Total gross income on both the sales and the subject keeps the comparison consistent.
Background Knowledge
Appraisers commonly speak of gross rent multipliers for smaller residential properties. A gross income multiplier is generally more useful for larger apartment projects and some commercial properties, which often return income from sources other than basic building rent.
Real-World Application
An appraiser values a large garden-apartment complex with paid parking and a laundry room. Sales of similar complexes report total gross income, so a gross income multiplier gives a more complete comparison than rent alone.
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?
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?
Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
An appraiser is updating a prior appraisal of a triplex with potential gross income of $60,000 and no other income. The prior appraisal used vacancy and credit loss of 5% of PGI, and a new survey of competing rentals indicates 8%. The operating expenses of $24,000 are property taxes, insurance and contract services that do not vary with occupancy, and the market overall rate remains 7.5%. By what percentages do effective gross income and indicated value decrease?
Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
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