Gross Income Multiplier
Gross Income Multiplier (GIM) is used to calculate a relationship between gross income and value. It is an indicator of the market value of an investment property[1].
In most cases, an annual Gross Income Multiplier is used for industrial or commercial real estate. On the other hand, a monthly Gross Income Multiplier is usually used for private property. As a rule, the multiplier for a single-family home is named a Gross Rent Multiplier (GRM), since its earnings are for the most part limited to rent[2].
7 steps to calculate Gross Income Multiplier
Robert W. Burchell and David Listokin identified 6 six steps to establish real property value and a seventh step to determine the Gross Income Multiplier. Those indications can be used for both residential properties (e.g. garden apartments) and commercial income properties (e.g. regional shopping centers). These guides can be written in a shortened form as follows[3]:
- Step 1 - "Determine annual gross income.
- Step 2 - Calculate effective annual gross income by applying an occupancy factor to annual gross income.
- Step 3 - Calculate total annual expenses by applying an expense ratio to annual gross income.
- Step 4 - Determine annual net operating income by subtracting total annual expenses from annual gross income.
- Step 5 - Calculate the capitalization rate using empirical information on mortgage-equity ratio, interest rate/term, and the equity dividend.
- Step 6 - Determine real property value by dividing annual net operating income by the capitalization rate.
- Step 7 - Derive income multipliers by dividing real property value by annual gross income".
Formula used to calculate Gross Income Multiplier:
Disadvantages of Gross Income Multiplier
The gross income multiplier method is not precise enough to be accepted as the only measure of market value. It does not take into consideration the numerous property variables that contribute to the total income earned. It also fails to take into account factors that can decrease effective net income, for example, most of real estate expenses. Despite its disadvantages, Gross Income Multiplier may be useful to check the market value estimate calculated by another appraisal method, since it is not relatively difficult to use[4].
Examples of Gross Income Multiplier
- The most common way of calculating the Gross Income Multiplier is to divide the estimated market value of a property by its gross income. For example, a property with a market value of $500,000 and a gross income of $50,000 would have a GIM of 10 ($500,000/$50,000).
- Income Capitalization Rate (ICR) is another way to calculate GIM, which is the ratio of the net operating income (NOI) to the value of the property. For example, a property with a market value of $500,000 and a NOI of $50,000 would have an ICR of 10% ($50,000/$500,000).
- The Adjusted Gross Income Multiplier (AGIM) is a more complex formula that takes into account additional factors such as vacancy, expenses, and debt service. For example, a property with a market value of $500,000, a gross income of $50,000, and a vacancy rate of 10% would have an AGIM of 9 ($500,000/($50,000*(1-0.1))).
Gross Income Multiplier (GIM) is an indicator of the market value of an investment property, by calculating the relationship between gross income and value.
Other approaches related to GIM include:
- Capitalization Rate (Cap Rate) - This approach takes the net operating income (NOI) of a property and divides it by the current market value.
- Price Per Unit - This approach takes the total sale price of a property and divides it by the total number of rental units.
- Gross Rent Multiplier (GRM) - This approach takes the sale price of a property and divides it by the gross rental income.
These approaches all serve to provide an indicator of the market value of an investment property. They are used by investors to compare various properties and determine the best one to invest in.
Footnotes
| Gross Income Multiplier — recommended articles |
| Net present value (NPV) — Adjusted present value — WACC — Adjusted ebitda — Nominal rate of return — Accounting rate of return — Annualized rate — Money-weighted rate of return — Earnings Multiplier |
References
- Boykin J. H., Gray M. T. (1994), The relevance and application of the gross income multiplier, "The Appraisal Journal", nr 2
- Burchell W. R., Listokin D. (2012), Fiscal Impact Handbook: Estimating Local Costs and Revenues of Land Development, Transaction Publishers
- Parker D. (2012), Global Real Estate Investment Trusts: People, Process and Management, John Wiley & Sons
- Stapleton C. O., Williams M. R. (2004), California Real Estate Principles, Dearborn Real Estate
Author: Joanna Pawlik
