Which facts best support applying a gross-rent multiplier?
Correct Answer
B) Verified rented sales with matching rent bases and operations.
Similar income bases, losses and expense structures support a gross multiplier’s applicability. Data scarcity or merely unknown expenses does not establish that similarity. Mixed leases may require more explicit analysis, but property labels alone do not universally prohibit gross multipliers.
Why This Is the Correct Answer
Option B is correct because a gross multiplier is applicable when comparable sales are similar to the subject in income potential, expense ratios and other characteristics. Verified rented sales with matching rent bases and similar operating characteristics meet that need.
Why the Other Options Are Wrong
Option A: Fewer than three sales exist, whether comparable or not.
Option A, that fewer than three sales exist, whether comparable or not, describes scarcity of data, not similarity. A small number of sales, especially non-comparable ones, does not support a reliable multiplier.
Option C: All expenses are unknown, which proves they can be ignored.
Option C, that all expenses are unknown and this proves they can be ignored, is faulty reasoning. A GRM relies on comparables having similar expense patterns; not knowing the expenses does not establish that similarity.
Option D: The label matches, but lease terms and expenses differ materially.
Option D, a matching label while lease terms and expenses differ materially, undermines a GRM. Material differences in income and expense structure make a gross multiplier unreliable even when the property type sounds the same.
Same rent basis, same expenses
A GRM borrows the comparables' expense pattern without showing it, so the comparables must share the subject's rent basis and operating profile.
How to use: Use this test to judge whether a GRM answer choice describes adequate support.
Exam Tip
Choose the answer that stresses verified, similar comparables; data scarcity or unknown facts do not justify a method.
Common Mistakes to Avoid
- -Treating unknown expenses as proof they do not matter
- -Using properties with very different lease terms because they share a label
- -Relying on too few non-comparable sales
Concept Deep Dive
Analysis
This question tests when a gross rent multiplier is reliable. Because a GRM ignores expenses, it works only when the comparables are similar to the subject in income basis, losses and expense structure. Verified sales of rented properties with matching rent bases and similar operating characteristics best support it.
Background Knowledge
Gross multipliers relate price to gross income and skip the expense analysis. They give credible results only when the subject and comparables share similar expense ratios, vacancy patterns and lease terms. Where those differ materially, a more explicit NOI-based analysis is often needed.
Real-World Application
An appraiser valuing a rented single-family home finds several verified sales of similar rented homes in the neighborhood with comparable lease terms and tenant-paid utilities. Because the rent bases match, the appraiser develops a reliable monthly GRM.
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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An appraiser is developing an overall rate for a stabilized office building and has researched four cash sales of similar buildings. Sale 1 sold for $1,280,000 with NOI of $96,000. Sale 2 sold for $2,000,000 with NOI of $156,000. Sale 3 sold for $1,000,000 with NOI of $72,000. Sale 4 was half vacant and in lease-up when it sold for $1,500,000, with in-place NOI of $61,500 and projected stabilized NOI of $136,500. Using the sales suited to this subject, what is the mean overall rate?
Next Question
The equity interest in a property is known to be worth $300,000, and its annual equity dividend rate is 10%. Annual NOI is $72,000 and the mortgage constant is 7%. What total property value does the mortgage residual technique indicate?