Gross Income Multiplier

Gross Income Multiplier
See also
EBITDAR Normal cost Net yield Yield maintenance Money-weighted rate of return Appraisal right Implicit interest rate Adjusted ebitda Fixed-Charge Coverage Ratio

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.

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.

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:

• 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:

${\frac {EstimatedStructureValue}{PotentialAnnualGrossIncome}}=GrossIncomeMultiplier$

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.

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