What is a 'Gross Income Multiplier'

A gross income multiplier (GIM) is a rough measure of the value of an investment property that is obtained by dividing the property's sale price by its gross annual rental income. GIM is used in valuing commercial real estates, such as shopping centers and apartment complexes, but is limited in that it does not consider the cost of factors such as utilities, taxes, maintenance, and vacancies. Other, more detailed methods commonly used to value commercial properties include capitalization rate (cap rate) and the discounted cash flow method.

BREAKING DOWN 'Gross Income Multiplier'

The gross income multiplier can be used to roughly determine whether the asking price of a property is a good deal. Multiplying the GIM by the property's gross annual income yields the property's value, or what it should be selling for.

Example of Gross Income Multiplier Calculation

For example, we've found 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/$56,000 = 7.

We’d conclude this comparable (or “comp” as is it often called in practice) sold for 7 times (7x) its effective gross. Using this multiplier, we see this property has a capital value of $350,000. Which is found by: V = GIM x EGI, 7 x $50,000 = $350,000.

Drawbacks to Gross Income Multiplier Method

A natural argument against the multiplier method arises because it’s a rather crude valuation technique. Because changes in interest rates (which effect discount rates in the time value of money calculations), sources or revenue (quality), and expenses are not explicitly considered – the gross income multiplier is hardly a practical valuation model, but it does offer a “back of the envelope” starting point.

Other drawbacks include:

  • The GIM method assumes uniformity in properties across similar classes. Practitioners know from experience that expense ratios among similar 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 though their gross incomes differ significantly. Thus, the GIM method can easily be misused by those who don’t appreciate its limits.
  • A GIM fails to account for the remaining economic life of comparable properties. By ignoring remaining economic life, a practitioner can assign equal values to a new property and a 50-year-old property, assuming they generate equal incomes.
  1. Income Approach

    An income approach is a real estate appraisal method that allows ...
  2. Gross Income

    Gross income is the total income from all sources before deductions ...
  3. Property Tax

    Property tax is an ad valorem tax assessed on real estate by ...
  4. Personal Property

    Personal property is a type of property which can include any ...
  5. Commercial Property

    Commercial property is buildings and land that are intended for ...
  6. One Percent Rule

    The one percent rule is a rule of thumb used to determine if ...
Related Articles
  1. Taxes

    Sell Your Rental Property for a Profit

    Learn how to sell your rental property for a profit. Find out how to master the selling process.
  2. Taxes

    Getting U.S. Tax Deductions On Foreign Real Estate

    If your home or second home is not in the United States, you can still get U.S. tax deductions. How many and what kind depends on whether you also rent it.
  3. Investing

    8 Must-Have Numbers For Evaluating A Real Estate Investment

    These calculations can help you figure out if a particular property will be a valuable investment.
  4. Investing

    Use Real Estate To Put Off Tax Bills

    Find out how you can build wealth and reduce your taxes.
  5. Personal Finance

    State Laws Dictate Division Of Joint Property

    In breakup, divorce or death, community or common law will determine how property is divided.
  6. Investing

    Investing in out-of-state property

    If you can't afford property close to home, consider taking the real estate plunge elsewhere in the country, perhaps out of state.
  7. Taxes

    10 Things to Know About 1031 Exchanges

    Real estate swaps grow popular, but traps are many. Here's 10 things to know when considering 1031 swaps. Also: Beware new rules on vacation homes.
  8. Investing

    Including Rental Real Estate in Your Portfolio

    Why you should consider adding rental properties to your retirement investment portfolio.
  9. Managing Wealth

    10 Tips for Buying Your First Rental Property

    Buying a property for rental income is a bit different than buying a home to live in.
  10. Investing

    Is Property Management Worth it? Ask Yourself These 8 Questions

    If you own rental properties, ask yourself these questions when deciding who should manage them.
  1. What is the difference between gross income and earned income?

    The difference between earned income and gross income is an important one come tax time. Find out how the IRS uses both to ... Read Answer >>
  2. What is the difference between taxable income and gross income?

    Learn the basic differences between the terms gross income and taxable income, and what is included in the total of each ... Read Answer >>
Trading Center