Market data show a price-to-income multiplier of 9.75, derived from the annual EGI of similar properties. The subject's annual EGI is $92,000. What value does the multiplier indicate?
Correct Answer
D) $897,000
92000×9.75 = 897000. Common errors: treating the annual income as monthly gives $74,750; dividing by the multiplier instead of multiplying gives $9,436; rounding the multiplier down to 9 gives $828,000.
Why This Is the Correct Answer
Option D is correct because $92,000 × 9.75 = $897,000. The multiplier is based on annual EGI, the same income as the subject's, so straight multiplication gives the indicated value.
Why the Other Options Are Wrong
Option A: $9,436
Option A, $9,436, comes from $92,000 ÷ 9.75, dividing by the multiplier instead of multiplying. The value is $92,000 × 9.75 = $897,000.
Option B: $74,750
Option B, $74,750, comes from $92,000 × 9.75 ÷ 12, treating the annual income as if it required a monthly conversion. The value is $92,000 × 9.75 = $897,000.
Option C: $828,000
Option C, $828,000, rounds the multiplier down to 9: $92,000 × 9 = $828,000. The market multiplier is 9.75, so the value is $92,000 × 9.75 = $897,000.
Same income, same multiplier
An EGI multiplier goes with EGI, a PGI multiplier with PGI, and annual with annual.
How to use: Use this check before applying any income multiplier.
Exam Tip
Read the stated income definition and period, then multiply only once; extra conversions are the usual trap.
Common Mistakes to Avoid
- -Dividing income by the multiplier
- -Converting annual income to monthly
- -Applying an EGI multiplier to PGI or NOI
Concept Deep Dive
Analysis
This question tests applying an annual EGI multiplier to annual EGI. The multiplier and the income share the same definition and period, so you multiply directly. Distractors come from dividing, treating annual income as monthly, or rounding the multiplier down.
Background Knowledge
An effective gross income multiplier relates price to EGI and is applied to the subject's EGI to indicate value. It must be applied to the same level of income from which it was derived. Mixing EGI with PGI or NOI, or annual with monthly figures, gives misleading results.
Real-World Application
An appraiser derives annual EGI multipliers from several comparable sales of small apartment buildings. She applies a multiplier of 9.75 to the subject's annual EGI to reach an indication of $897,000.
More Income Approach Questions
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Previous Question
A rented comparable sold for a cash-equivalent price of $418,000 with monthly gross rent of $1,900. The subject has monthly gross rent of $2,050. Market data indicate the subject would sell at the same price-to-rent ratio, with no other adjustments. What is the indicated value of the subject, to the nearest dollar?
Next Question
A client is comparing two four-unit apartment properties. Property A has PGI of $72,000, vacancy and credit loss of 8%, an operating expense ratio of 45% of EGI, and a market overall rate of 8%. Property B has PGI of $63,000, vacancy and credit loss of 4%, an operating expense ratio of 40% of EGI, and a market overall rate of 7.5%. Which property has the higher indicated value, and by how much?