Gross Income Multiplier

Gross Income Multiplier The Income Approach for single family and small (two to four unit) residential properties Wayne Foss, MBA, MAI, CRE Foss Consulting Group Email: wfoss@fossconsult.com

SOURCE Estimate market GIM Estimate market Gross Income Monthly or Annual From the market analyze comparable sales to develop an indication of gross income multipliers GIM = Price  Gross Income APPLICATION Reconcile the multiple indications of multipliers Use the GIM found in the market and the estimate of subject property gross income expected to develop an indication of value. Value = GI * GIM GIM - The Mechanics Premise: There is a relationship between a property’s ability to produce income and its value.

For Example • Your “Subject Property” is rented for $48,000 per year. • Properties in the marketplace have recently sold which were rented at the time of sale. • Typical: Sale Price = $400,000, and the Annual Gross Rent equaled $50,000. • Thus, the market GIM is: • GIM = $400,000 / $50,000 = 8.0 • So to estimate the subject’s value: • Value = Gross Income * GIM or • Value = $48,000 * 8.0 = $384,000

The Key Steps • 1. Research to find several sales of similar properties rented at the time of sale. • Similarities should include terms of lease, expenses, income characteristics, and physical and locational characteristics. • 2. Calculate the GIM for each • Use either monthly or annual gross income • 3. Research the market to estimate probable Gross income for the appraised property • 4. Apply the GIM to the estimated Gross income for the appraised property to find the estimated value.

GIM Techniques works best when . . . • The market GIM is derived from properties which are very similar to each other and to the one appraised … and were rented when sold. Also, • A reliable estimate may be made for expected subject gross income • Usually based on actual income and/or income generated by similar properties in the market

Example of GIM Information from the Market Sale Price Gross Income GIM 1 $600,000 $100,000 6.0 2 $720,000 $140,000 5.1 3 $660,000 $100,000 6.6 4 $550,000 $90,000 6.1

Key Benefits: Advantages of using the GIM • Simplicity • Simple to Understand • Simple to Use

Disadvantages • Data Requirements; may not be available in sufficient quality and quantity • Comparable sales rented at time of sale • Enough data of sufficient similarity • Verification of rental details may be difficult • Danger of OVER-SIMPLIFICATION; not considering important differences in • Property features • Expenses • Financing Structures • Market and rental outlook

Remember . . . • GIM is gross Annual income from all sources. Other multipliers may sometimes be used, such as using monthly income • GRM (Gross Rent Multiplier) is the same concept, but uses ONLY RENTAL income and excludes “other” income (laundry, vending, storage, etc.)

Also Remember . . . • Gross Income may be Potential (PGI) or Effective (EGI); it is critical to be CONSISTANT in deriving and applying multipliers. • Multipliers must be applied to the subject using the same type or level of gross income as that used in deriving the multiplier from the market. • Potential or Effective Gross Income • Income from all sources, or only rent

Caution . . . • There must be consistency between derivation and application. GRM or GIM must be applied to the same type of gross income as the data used to derive it. • i. e.: A multiplier derived from potential gross income must be applied to potential gross income; • If derived from effective gross income, it must be applied to effective gross income

When GIM should be used • GIM may be useful when there is a sufficient Quality and Quantity of rental and sales information available. • Depth of information is important • Used as the Income Approach to value when • Valuing Single family and small (2 to 4) unit residential properties • Used as another Unit of Comparison when • Valuing Income Producing Properties

Gross Income Multipliers . . . Are there any Questions? Wayne Foss, MBA, MAI, CRE, Fullerton, CA USA Phone: (714) 871-3585 Fax: (714) 871-8123 Email: wfoss@fossconsult.com

Gross Income Multiplier