Gross Income Multiplier

What is Gross Income Multiplier?

Gross Income Multiplier is used to appraise the value of the property like commercial real estate, apartments for rent, shopping center, etc. and is calculated as the ratio of the Current Value of the investment/property to its gross annual income earned.

Gross Income Multiplier Formula

Gross Income Multiplier Formula = Current Value of the Property / Gross Annual Income of the Property
Gross-Income-Multiplier

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For eg:
Source: Gross Income Multiplier (wallstreetmojo.com)

Hence, the gross income multiplier is the ratio of the current value and annualized income of a property or an investment that is required to be sold off.

Thus it can be said as it is the Fair Market Value of the property.

Example of Gross Income Multiplier

Suppose Mr. X has a house property in a specific location. As per the market conditions and according to similar properties in the neighboring location, the current value of the property is $7 million. Further, it was rented out by him to its tenants, which generated an annualized rental income if $1 million. Calculate the gross income multiplier of the house property of Mr. X.

Solution

Calculation of Gross Income Multiplier

gross income multiplier example 1
  • = $7 million   / $1 million
  •  = 7 times

Advantages

Following are various advantages which include the following:

Disadvantages

The different limitations and drawbacks include the following:

  • One of the most significant disadvantages of gross income multiplier is that it does not take into consideration expenses and other related costs into account while calculating the income multiplier. Hence costs like license, cost of utilization, maintenance taxes, etc.
  • The vacancy is not taken into consideration under GIM, which is an essential part of a house property. Thus final multiplier answer may be irrelevant.
  • It can only be used for comparison purposes with other property; thus, it is a very strong concept in relative terms, and however, it doesn’t gain much importance in Absolute terms.
  • This concept is usually used in real estate properties, rental properties, and investments; however, in other fields like buildings, etc. it does not gain much of the importance.

Important Points

  • It is essential to take note that the concept of gross income multiplier has been in use since the era where real estate property is being sold. Hence it has been used since the year 1740 when Thomas Miles showed income multiplier variations.
  • Richard Radcliff states that if the concept of GIM is used properly, it can also be used in determining the market value of the property by filling up details in the formula and taking the current market value of the property variable.
  • It is a market-derived concept and hence gains many meanings as it is a market-derived concept that doesn’t change with personal judgments as it is an objective concept as against other subjective concepts.

Conclusion

To determine whether a property is sold at a good deal and as per its current market conditions depending upon its annualized income, the Gross income multiplier can be easily applied by anybody without incurring much cost and spending more time. Hence common use and easy application of this concept is a beneficial concept.

This article has been a guide to Gross Income Multiplier. Here we discuss the formula to calculate gross income multiplier along with a practical example, advantages & disadvantages. You may learn more about accounting from the following articles –

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