Certified Residential Appraiser Practice Exam

Which formula is used in calculating the Gross Income Multiplier?

1. Total expenses divided by gross income

2. Sale price divided by effective gross income

3. Net income divided by total assets

4. Property value divided by market interest rate

The correct answer is: Sale price divided by effective gross income

The formula used to calculate the Gross Income Multiplier (GIM) involves dividing the sale price of a property by its effective gross income. This approach helps appraisers and investors quickly assess the value of income-producing properties based on their ability to generate revenue. The GIM essentially reflects how much investors are willing to pay for each dollar of income generated, making it a valuable tool in property valuation and comparison. When calculating GIM, the effective gross income is essential because it represents the income the property is expected to generate after accounting for vacancy and credit losses, which provides a more realistic view of the cash flow potential. Thus, by using the sale price in relation to the effective gross income, you gain insight into the property's market value in relation to its earning capacity. This formula is particularly useful for comparing similar properties and determining the relative value based on income performance.