Gross Income Multiplier

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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_at_fossconsult.com
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GIM - The Mechanics
Premise There is a relationship between a
propertys ability to produce income and its
value.

• 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

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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 subjects value
• Value Gross Income GIM or
• Value 48,000 8.0 384,000

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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.

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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

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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
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Key Benefits Advantages of using the GIM

• Simplicity
• Simple to Understand
• Simple to Use

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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

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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.)

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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

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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

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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

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Gross Income Multipliers . . .
Are there any Questions?
Wayne Foss, MBA, MAI, CRE, Fullerton, CA
USA Phone [phone] Fax [phone]
Email wfoss_at_fossconsult.com