For a multiplier explicitly defined on monthly gross rent, which formula is correct?
Correct Answer
B) Cash-equivalent sale price ÷ monthly gross rent.
The denominator is the stated monthly gross-rent measure, so price divided by that rent yields the monthly multiplier. NOI divided by price is an overall capitalization rate. GRM can be defined on other periods, but those periods must be explicit and consistent.
Why This Is the Correct Answer
Option B is correct because a gross rent multiplier is the relationship between sale price and gross rent, derived by dividing sale price by gross income. When the multiplier is defined on monthly gross rent, the denominator is monthly gross rent. Cash-equivalent sale price divided by monthly gross rent therefore gives the monthly multiplier.
Why the Other Options Are Wrong
Option A: Monthly gross rent ÷ cash-equivalent sale price.
Option A, monthly gross rent divided by cash-equivalent sale price, is the inverse of the multiplier. It produces a small income-to-price fraction rather than a factor that multiplies rent to estimate value.
Option C: Annual NOI ÷ cash-equivalent sale price.
Option C, annual NOI divided by cash-equivalent sale price, is the formula for an overall capitalization rate. It uses net annual income, not monthly gross rent, and is a rate rather than a multiplier.
Option D: Cash-equivalent sale price ÷ annual net income.
Option D, cash-equivalent sale price divided by annual net income, is a net income multiplier based on annual net income. The question asks for a multiplier defined on monthly gross rent, so this uses the wrong income level and the wrong period.
Price on top for multipliers
Multipliers put price over income and come out as a factor; rates put income over price and come out as a percentage.
How to use: Use this to separate multiplier formulas from capitalization rate formulas.
Exam Tip
Check both the income level (gross or net) and the period (monthly or annual) named in the question before picking a formula.
Common Mistakes to Avoid
- -Inverting the multiplier as rent divided by price
- -Confusing a gross rent multiplier with an overall capitalization rate
- -Using annual net income when the multiplier is defined on monthly gross rent
Concept Deep Dive
Analysis
This question tests the definition of a gross rent multiplier stated on monthly rent. A multiplier expresses value as a multiple of income, so price goes in the numerator and the stated income measure goes in the denominator. The other choices invert the ratio or describe capitalization rates or net income measures.
Background Knowledge
Gross rent and gross income multipliers are derived by dividing sale price by the corresponding gross income measure. The period and income level, such as monthly versus annual and gross versus net, must be stated explicitly and used consistently.
Real-World Application
For a single-family rental, an appraiser divides each comparable's cash-equivalent sale price by its monthly market rent to extract a GRM. The appraiser then applies a reconciled GRM to the subject's estimated monthly market rent.
More Income Approach Questions
Which stated cause of supported value loss is external?
Improvement cost new is $450,000. Separately supported improvement depreciation deductions of $45,000, $25,000, $15,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $125,000, already reflecting any site losses. What total indicated value results?
Which two depreciation categories may each be classified as curable or incurable by comparing the cost to remedy a deficiency with the value gained?
Improvement cost new is $800,000. Separately supported improvement depreciation deductions of $120,000, $80,000, $40,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
The principle of anticipation in real estate valuation states that:
Which highest-and-best-use criterion addresses whether a proposed use is allowed by zoning and applicable legal restrictions?
Three comparables produce adjusted indications of $312,000, $309,000 and $315,000, requiring gross adjustments of 9%, 14% and 22% respectively. Verification also establishes that the first sale is the closest competitive substitute and its adjustments are better supported than the other two. Which indication deserves the most weight on those facts?
When reconciling value indications from the three approaches to value, an appraiser should:
A property sold at a cash-equivalent price of $1,062,500. Its stabilized annual NOI is $85,000. What is the indicated overall rate?
In reconciliation, an appraiser should:
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