Gross Income Multiplier

What Is a Gross Income Multiplier?

A gross income multiplier (GIM) is an unpleasant measure of the value of an investment property. It is calculated by partitioning the property's sale price by its gross annual rental income. Investors can use the GIM — alongside other methods like the capitalization rate (cap rate) and discounted cash flow method — to value commercial real estate properties like shopping centers and apartment complexes.

Understanding the Gross Income Multiplier

Esteeming an investment property is important for any investor before signing the real estate contract. In any case, unlike other investments — like stocks — there's no easy method for getting it done. Numerous professional real estate investors believe the income generated by a property is substantially more important than its appreciation.

The gross income multiplier is a metric widely used in the real estate industry. It very well may be used by investors and real estate professionals to make an unpleasant determination whether a property's asking price is a fair setup — very much like the price-to-earnings (P/E) ratio can be used to value companies in the stock market.

Multiplying the GIM by the property's gross annual income yields the property's value or the price for which it ought to be sold. A low gross income multiplier means that a property might be a more attractive investment because the gross income it generates is a lot higher than its market value.

Special Considerations

A gross income multiplier is a decent general real estate metric. Be that as it may, there are limitations because it doesn't take different factors into account including a property's operating costs including utilities, taxes, maintenance, and vacancies. For the same reason, investors shouldn't use the GIM as a method for comparing a potential investment property to another, comparative one. To make a more accurate comparison between two or more properties, investors ought to use the net income multiplier (NIM). The NIM factors in both the income and the operating expenses of each property.

Use the net income multiplier to compare two or more properties.

Disadvantages of the Gross Income Multiplier Method

The GIM is a great starting point for investors to value prospective real estate investments. That is because it's easy to calculate and provides an unpleasant picture of what purchasing the property can mean to a buyer. The gross income multiplier is not really a practical valuation model, yet it does offer a back of the envelope starting point. Yet, as mentioned above, there are limitations and several key disadvantages to consider when involving this figure as a method for esteeming investment properties.

A natural argument against the multiplier method arises because it's a rather crude valuation technique. Because changes in interest rates — which affect discount rates in the time value of money estimations — sources, revenue, and expenses are not explicitly considered.

Other downsides include:

• The GIM method assumes consistency in properties across comparable classes. Practitioners know for a fact that expense ratios among comparable properties often differ as a result of such factors as deferred maintenance, property age and the quality of property manager.
• The GIM estimates value based on gross income and not net operating income (NOI), while a property is purchased based primarily on its net earning power. It is entirely possible that two properties can have the same NOI even however their gross incomes differ fundamentally. Subsequently, the GIM method can easily be misused by those who don't appreciate its limits.
• A GIM neglects to account for the remaining economic life of comparable properties. By disregarding remaining economic life, a practitioner can assign equal values to a new property and a 50-year-old property — expecting they generate equal incomes.

Example of Gross Income Multiplier Calculation

A property under review has an effective gross income of $50,000. A comparable sale is available with an effective income of $56,000 and a selling value of $392,000 (in reality, we'd seek a number of comparable to improve analysis).

Our GIM would be $392,000 \u00f7 $56,000 = 7.

This comparable — or comp as is it often called in practice — sold for seven times (7x) its effective gross. Utilizing this multiplier, we see this property has a capital value of $350,000. This is found utilizing the following formula:

V = GIM x EGI

7 x $50,000 = $350,000.

Features

• A gross income multiplier is an unpleasant measure of the value of an investment property.
• Investors shouldn't use the GIM as the sole valuation metric because it doesn't take an income property's operating costs into account.
• GIM is calculated by partitioning the property's sale price by its gross annual rental income.