A supported price-to-income multiplier of 18 is explicitly defined on the same period and income basis as the subject’s $96,000 annual income. With no further adjustments, what value is indicated by multiplying the two?
Correct Answer
C) $1,728,000
96000×18 = 1728000. Common errors: dividing by the multiplier instead of multiplying gives $5,333; dividing the result by 12 as if a monthly figure were needed gives $144,000; annualizing income that is already annual (×12) gives $20,736,000.
Why This Is the Correct Answer
Option C is correct because the multiplier of 18 and the $96,000 annual income share the same period and basis, so value = $96,000 × 18 = $1,728,000. No further conversion is needed.
Why the Other Options Are Wrong
Option A: $5,333
Option A, $5,333, divides income by the multiplier: $96,000 ÷ 18 = $5,333. A multiplier is applied by multiplication, giving $1,728,000.
Option B: $144,000
Option B, $144,000, divides the correct result by 12: $96,000 × 18 ÷ 12 = $144,000. The bases already match, so the value is $1,728,000 without conversion.
Option D: $20,736,000
Option D, $20,736,000, multiplies already-annual income by 12 again: $96,000 × 12 × 18 = $20,736,000. The income is already annual and matches the multiplier, so value is $96,000 × 18 = $1,728,000.
Matched basis, just multiply
If the multiplier and the income already match, convert nothing and multiply once.
How to use: Use it to avoid extra times-12 or divide-by-12 steps.
Exam Tip
Check whether the income is already annual before converting; double-annualizing produces an answer twelve times too large.
Common Mistakes to Avoid
- -Dividing income by the multiplier
- -Multiplying annual income by 12 again
- -Dividing the result by 12
Concept Deep Dive
Analysis
This question tests applying a multiplier to annual income already stated on the same basis. Because the multiplier and income match, the value is simply income times the multiplier. Distractors divide or add unneeded conversions by twelve.
Background Knowledge
A gross income multiplier is applied to the same level and period of income from which it was derived. When the problem states the bases match, multiply income by the multiplier with no adjustment.
Real-World Application
An appraiser derives an annual gross income multiplier from sales of two- to four-unit residential buildings and applies it to the subject's annual gross income. Because both are annual figures, the appraiser multiplies directly.
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?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Previous Question
Annual operating expenses are $98,000, excluding debt service. Annual effective gross income is $280,000. Using EGI as the denominator, what operating expense ratio results?
Next Question
An appraiser is extracting an overall capitalization rate from the sale of a 16-unit apartment building. The recorded price was $1,500,000, including favorable seller financing, and the cash equivalent price is $1,400,000. The broker reports NOI of $124,000. The owner managed the property, and the statement shows no management charge; management of similar properties costs $12,000 per year. The appraiser's income estimate for the subject includes a market management expense. What overall capitalization rate is indicated?