What does an annual gross income multiplier (GIM) measure for a rental property?
Correct Answer
B) The relationship between property value and annual gross rental income
The explicitly annual GIM is price divided by the matching annual gross-income denominator. It is a gross measure, not an operating expense ratio or net-income capitalization rate. Other multipliers can use other stated periods; the name alone does not force a monthly basis for GRM.
Why This Is the Correct Answer
Option B is correct because an annual GIM is price or value divided by annual gross income, expressing their relationship as a factor. Multiplying the subject's annual gross income by a supported GIM gives an indication of value. It works on gross income, not on expenses or net income.
Why the Other Options Are Wrong
Option A: The relationship between vacancy rates and rental income
Option A, the relationship between vacancy rates and rental income, describes a vacancy analysis, not a multiplier. A GIM compares value or price with gross income.
Option C: The relationship between operating expenses and gross income
Option C, the relationship between operating expenses and gross income, describes an operating expense ratio. A GIM does not involve expenses; it compares price or value with gross income.
Option D: The relationship between net operating income and property value
Option D, the relationship between net operating income and property value, describes an overall capitalization rate. A GIM uses gross income, not net operating income.
Gross times multiplier equals value
GIM = Price ÷ Gross income, so Value = Gross income × GIM.
How to use: Use this when asked what a GIM measures or how to apply it to a subject property.
Exam Tip
Match the ratio to its components: gross income goes with multipliers, net operating income goes with capitalization rates, and expenses over income is an expense ratio.
Common Mistakes to Avoid
- -Confusing a GIM with an overall capitalization rate based on NOI
- -Applying an annual multiplier to monthly income
- -Treating the GIM as an expense ratio
Concept Deep Dive
Analysis
This question tests what a gross income multiplier compares. A GIM relates sale price or value to gross income and is applied as a multiple of income to estimate value. Recognizing that it is a gross measure lets you rule out ratios built on expenses, vacancy, or net income.
Background Knowledge
Income multipliers are simple ratios of sale price to income extracted from comparable sales. A gross income multiplier uses gross income, while a capitalization rate uses net operating income. The multiplier must be applied to the same kind and period of income from which it was derived.
Real-World Application
An appraiser valuing a small rental building finds several recent sales of similar buildings with known annual gross rents. She divides each sale price by its annual gross income to derive GIMs, then applies a supported GIM to the subject's annual gross income.
More Income Approach Questions
An undamaged but functionally inadequate system causes a supported $60,000 loss. Replacement costs $85,000 and restores only $60,000, with no other benefits. What loss classification and deduction fit?
The subject is a 10-year-old dwelling with improvement cost new of $640,000. A highly comparable 7-year-old dwelling recently sold for $580,000; at the sale date its site was worth $150,000 and its improvement cost new was $500,000. Market evidence shows depreciation accruing evenly with actual age. What is the depreciated value of the subject improvements?
Observed sale prices are $450,000, $475,000, $425,000, $500,000, $440,000. Calculate the range (maximum−minimum), to the nearest dollar.
Observed values are 100, 105, 110, 115, 120. Calculate the range (maximum−minimum).
For an arithmetic illustration only, depreciate a historical $2,000,000 construction cost on a zero-salvage straight-line 40-year schedule for 10 years. What unindexed scheduled amount remains? This is not a conclusion of current market value or current replacement cost.
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For an arithmetic illustration, allocate historical construction cost $2,400,000 over 40 years on a zero-salvage equal annual schedule. After 8 years, what scheduled unindexed amount remains? This is not a current market-value conclusion.