What is Gross Income Multiplier?

A gross income multiplier appraises the property’s value, like commercial real estate, apartments for rent, shopping centers, etc. For example, one may calculate 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

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

  • Current Value of the Property – Current value of the property is the property’s current market price. The owner can determine this value by considering the current market and people’s expectations, location factors, etc. On the other hand, the owner can also take the price from any other property taking the sales history or rental income of a competitive property into consideration.Gross Income of the Property – Gross income includes the average annual rent of the apartments or buildings held for rentals, the average annual turnoverAnnual TurnoverAnnual turnover is the yearly sales or yearly receipts of a profession. In finance, the annual turnover is commonly referred to by mutual funds and exchange-traded funds (ETF), measuring its annual investment holdings that determine the health and activity levels of the fund.read more of the products for trading purposes, manufacturing purposes, etc. Thus, it is merely the income earned or expected from the property for which the deal finalizes.

Thus, one can say that it is the property’s fair market value.

Example of Gross Income Multiplier

Suppose Mr. X has a house property in a specific location. As per the market conditions and similar properties in the neighboring area, the property’s value is $7 million. Further, he rented it out to its tenants, generating an annualized rental income of $1 million. Calculate the gross income multiplier of Mr. X.

Solution:

The calculation of gross income multiplier: –

  • = $7 million   / $1 million = 7 times

Advantages

The following are various advantages which include: –

  • Due to the simplicity in calculating gross income multiplier, it has gained much academic attention. But, at the same time, it is also used practically to determine whether a particular property is receiving a good deal.It can be related to stock valuation since the ratio of this multiplier is the property’s current value divided by the property’s net operating incomeNet Operating IncomeNet Operating Income (NOI) is a measure of profitability representing the amount earned from its core operations by deducting operating expenses from operating revenue. It excludes non-operating costs such as loss on sale of a capital asset, interest, tax expenses.read more and connects with the traditional price/earnings ratio. Hence, it is based upon commonly used concepts.The concept of gross income multiplier is neither old nor much newer since used in property and real estate valuation for decades. However, not either has it gained a lot of usefulness by so many owners and individuals. One may use it in their day-to-day valuation over the period.It is very well relative to the current market and demand-supply conditions since the calculation makes it clear that with the rise in the value of the property in the market. The gross income multiplier increases, while with a reduction in the annualized rate of returnThe Annualized Rate Of ReturnThe annualized rate of return is the percentage of return an investment provides yearly. It serves as a basis for comparison when the rate of return on short-term investments (i.e., the ones made for less than a year) are annualized.read more or income from the property gross income multiplier tends to decrease.Since the gross income multiplier does not consider operating expensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more, it is straightforward to calculate the gross income multiplier of property sold out against other methods like the capitalization rateCapitalization RateCapitalization Rate is the rate that helps determining value of a real estate investment. It projects the expected rate of return on the investment made. read more.

Disadvantages

The different limitations and drawbacks include the following: –

  • One of the most significant disadvantages of the gross income multiplier is that it does not consider expenses and other related costs while calculating the income multiplier. Hence, costs like license, a fee of utilization, maintenance taxes, etc.The vacancy is not considered an essential part of a house property under the gross income multiplier. Thus, the final multiplier answer may be irrelevant.One can only use it for comparison purposes with other properties; thus, it is a very strong concept in relative terms. However, it does not gain much importance in absolute terms.This concept is usually used in real estate properties, rental properties, and investments. However, it does not gain much importance in other fields like buildings.

Important Points

  • It is essential to note that the concept of gross income multiplier has been used since the era when real estate property was sold. Hence, it has been used since 1740, when Thomas Miles showed income multiplier variations.Richard Radcliff states that if the concept of gross income multiplier is used properly, one can also use it to determine the property’s market value by filling up details in the formula and taking the current market value of the property variable.It is a market-derived concept. Hence, it gains many meanings as it is a market-derived concept that does not change with personal judgments as it is an objective concept against other subjective ideas.

Conclusion

To determine whether a property is sold at a good deal and per its current market conditions based on its annualized income, the gross income multiplier can be easily applied without incurring much cost and spending more time. Hence, this concept’s common use and easy application are beneficial.

This article is a guide to Gross Income Multiplier. We discuss the gross income multiplier formula calculation with an example, advantages, and disadvantages. You may learn more about accounting from the following articles: –

  • Book to Bill RatioOrdinary IncomeCompare – Operating Income vs. Net IncomeFormula of Money Multiplier