The effective gross income multiplier differs from an overall rate in that the EGIM:
Correct Answer
C) Is applied to income before operating expenses are deducted
Why this is correct: An Effective Gross Income Multiplier (EGIM) is calculated as Value / Effective Gross Income. Therefore, it is applied to income before operating expenses are deducted (EGI). The Overall Capitalization Rate (R) is applied to income after operating expenses (NOI). Why the other choices are wrong: 'Can only be used for owner-occupied residential property' is false; it can be used for income properties, though it's less precise. 'Requires the property's net operating income as its input' describes the cap rate, not the multiplier. 'Accounts for financing terms built into the transaction' is not a defining difference; both EGIM and R can be derived from transactions with or without specific financing. Exam tip: Multipliers use gross income (EGI or PGI); Cap Rates use net income (NOI).
Why This Is the Correct Answer
Why this is correct: An Effective Gross Income Multiplier (EGIM) is calculated as Value / Effective Gross Income. Therefore, it is applied to income before operating expenses are deducted (EGI). The Overall Capitalization Rate (R) is applied to income after operating expenses (NOI). Why the other choices are wrong: 'Can only be used for owner-occupied residential property' is false; it can be used for income properties, though it's less precise. 'Requires the property's net operating income as its input' describes the cap rate, not the multiplier. 'Accounts for financing terms built into the transaction' is not a defining difference; both EGIM and R can be derived from transactions with or without specific financing. Exam tip: Multipliers use gross income (EGI or PGI); Cap Rates use net income (NOI).
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An appraiser knows the site value and needs the building's contribution. Under the building residual technique, income attributable to the building is found by:
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A retail lease sets base rent plus 5% of sales above $800,000. The tenant sold $1,100,000 last year. The percentage (overage) rent was: