The effective gross income multiplier is calculated as:
Correct Answer
D) Sale price divided by effective gross income
The explicitly defined EGIM is cash-equivalent price divided by compatible effective gross income. Reversing the fraction gives an income-to-price rate, while using NOI changes the income level and produces a different ratio. Match definitions and periods in extraction and application.
Why This Is the Correct Answer
Option D is correct because the effective gross income multiplier is the cash-equivalent sale price divided by compatible effective gross income. A gross income multiplier is derived by dividing sale price by gross income, and the EGIM applies the same structure using EGI as the income level.
Why the Other Options Are Wrong
Option A: Sale price divided by net operating income
Option A, sale price divided by net operating income, uses NOI instead of EGI. That changes the income level and produces a different ratio, the reciprocal of an overall rate, not the EGIM.
Option B: Net operating income divided by sale price
Option B, net operating income divided by sale price, is the formula for an overall capitalization rate. It is a rate, not a multiplier, and it uses NOI rather than effective gross income.
Option C: Effective gross income divided by sale price
Option C, effective gross income divided by sale price, reverses the fraction. That produces an income-to-price ratio rather than a multiplier; the EGIM puts price on top.
Multiplier: price on top
A multiplier answers how many times income the price is, so price goes in the numerator. A rate answers what share of price the income is, so income goes on top.
How to use: Use this when deciding whether a ratio is a multiplier or a rate on the exam.
Exam Tip
Read the name of the multiplier to identify the denominator: PGIM uses potential gross income and EGIM uses effective gross income. Price is the numerator for any multiplier.
Common Mistakes to Avoid
- -Putting income in the numerator of a multiplier
- -Using NOI or PGI when the multiplier is defined on EGI
- -Applying a multiplier to a different income level than it was derived from
Concept Deep Dive
Analysis
This question tests the definition of the effective gross income multiplier. A multiplier is price divided by an income level, while a rate is income divided by price. The specific multiplier is named for the income level in the denominator, here effective gross income.
Background Knowledge
Income multipliers express the relationship between price and income as a factor. A potential gross income multiplier uses PGI, while an effective gross income multiplier uses EGI after vacancy and collection loss. A multiplier must be applied to the same level of income from which it was derived.
Real-World Application
An appraiser studying small apartment sales divides each cash-equivalent price by the property's EGI to extract EGIMs. She then applies the supported EGIM to the subject's EGI, not to its PGI or NOI.
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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