The subject property is a fourplex with potential gross income of $120,000. Stabilized vacancy/credit loss in its neighborhood is 10% of PGI. A similar fourplex in an adjoining neighborhood with lower vacancy sold for $855,000 cash equivalent, with PGI of $100,000 and stabilized vacancy/credit loss of 5% of PGI. What value does an effective gross income multiplier indicate for the subject?
Correct Answer
A) $972,000
The sale's EGI is $100,000 × 0.95 = $95,000, so the multiplier is $855,000 ÷ $95,000 = 9.0. The subject's EGI is $120,000 × 0.90 = $108,000, which indicates $972,000. Using the sale's 5% loss for the subject gives $1,026,000, applying the EGI multiplier to the subject's PGI gives $1,080,000, and adding the loss instead of deducting it gives $1,188,000.
Why This Is the Correct Answer
Option A is correct because the sale's EGI of $95,000 produces a multiplier of 9.0, and the subject's EGI after its own 10% loss is $108,000. Multiplying gives 9.0 × $108,000 = $972,000.
Why the Other Options Are Wrong
Option B: $1,026,000
Option B, $1,026,000, uses the sale's 5% loss for the subject: $120,000 × 0.95 × 9.0. The subject's supported loss is 10%, so the correct figure is $108,000 × 9.0 = $972,000.
Option C: $1,080,000
Option C, $1,080,000, applies the EGI multiplier to potential gross income: $120,000 × 9.0. A multiplier derived on EGI belongs on EGI, which gives $108,000 × 9.0 = $972,000.
Option D: $1,188,000
Option D, $1,188,000, adds the loss to income: $120,000 × 1.10 × 9.0. Vacancy and collection loss reduces income, so the correct calculation is $120,000 × 0.90 × 9.0 = $972,000.
Same level, own loss
The multiplier must sit on the same income level on both sides, and each property deducts its own loss. Same level, own loss.
How to use: Use this check whenever a multiplier is labeled EGI but the figures given are PGI.
Exam Tip
Note the income level named in the multiplier, then convert both properties to that level. Different loss rates are a signal that the two conversions will not match.
Common Mistakes to Avoid
- -Applying an EGI multiplier directly to PGI
- -Using the comparable's vacancy rate for the subject
- -Adding vacancy and collection loss to income
Concept Deep Dive
Analysis
The problem tests matching income levels when a multiplier is defined on EGI but the data arrive as PGI. Each property needs its own loss rate before any division or multiplication. The subject's higher loss must reach the final income figure, because the multiplier carries only the sale's loss experience.
Background Knowledge
Potential gross income is income before any vacancy and collection allowance, and effective gross income is what remains after it. A multiplier is reliable when applied to the same income level from which it was derived.
Real-World Application
An appraiser values a fourplex in a softer neighborhood using a sale from a stronger one. Working at the EGI level lets the appraiser reflect the subject's higher vacancy, which a straight PGI comparison would hide.
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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Previous Question
An appraiser is analyzing the sale of a fourplex to develop a gross income multiplier. The nominal sale price was $1,000,000, and the seller paid $40,000 in loan points to an institutional lender as part of the buyer's financing. Potential gross income at the time of sale was $120,000. The subject fourplex has potential gross income of $110,000. What is the indicated value of the subject?
Next Question
The subject property is a 14-unit apartment building with NOI of $140,000, valued using a 7% overall rate. A client asks how value would change if NOI falls 5% and the overall rate for similar properties rises to 8%. What percentage decrease in value would result?