Gross Income MultiplierDefined along with Formula & How to Calculate

Written By:
Lisa Borga

A gross income multiplier (GIM) is used to value investment or commercial properties.

The gross investment multiplier is the ratio of property value to gross income.

This ratio can be used in addition to other methods, such as the discounted cash flow method and the capitalization rate.

An Explanation of the Gross Income Multiplier

All investors are going to want to know the value of any investment property before signing any agreements.

However, determining the value of an investment property is not as easy as finding out the value of some other investments, such as stocks.

The gross income multiplier is a popular metric within the real estate industry.

It is useful for both real estate professionals as well as investors to get a rough idea as to whether or not the price of an investment property is reasonable or not.

If an investor multiplies the GIM by the gross annual income yields of the property, it will give the price the property should be sold for.

If the gross income multiplier is low, the property is probably a good investment since the property is generating a gross income that is above its market value.

GIM Formula and Example

The formula for the gross income multiplier is:

The current value of a commercial property is the present  market price of the property.

This price can be found by taking into account the location of the property along with the market and what people expect.

Or, the property owner could look at the price of another competitive property and consider its rental income or sales history.

The gross income for the investment property would consist of the average annual rent for the building or apartments or any income expected to be earned from the property.

As an example, an investor is considering a property with an effective gross income of $100,000.

Another similar property in the area has an effective income of $120,000 and sold for $720,000.

Generally, an investor would compare the property to more than one other property.

We will now use the following equation to compute the GIM.

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

GIM = $720,000/$120,000

GIM = 6

The comparable property sold for six times its effective gross income.

The investor can use this GIM to see whether or not their potential investment might be worthwhile.

In this case, a reasonable price would be $600,000 ($100,000 x 6)

Advantages and Disadvantages of the Gross Income Multiplier

Advantages of the Gross Income Multiplier

Here are a few advantages of the gross income multiplier.

• The GIM can be used to decide whether or not a specific property is being offered at a good price.
• The gross income multiplier is similar to the price-to-earnings ratio as it is based on similar concepts.
• The GIM is affected by supply and demand in the market. As property values increase in the market, GIM increases. Whereas, if the income or annualized rate of return decreases, GIM will also decrease.
• Because the GIM does not take operating expenses into account, it is easy to compute the GIM of an investment property if it has already been sold as compared to other methods that could be used, such as capitalization rate.

Disadvantages of the Gross Income Multiplier

There are some disadvantages or limitations to consider when using the gross income multiplier, such as:

• Perhaps the greatest disadvantage of the GIM is the fact that the multiplier doesn’t take into account expenses or other relevant costs during the calculation. Therefore, costs, such as maintenance costs, licenses, and utilities, are not part of the calculation.
• This ratio is mainly used for rental and real estate properties and not as much for buildings and other properties.
• The GIM is based on gross income rather than net operating income. But, properties can have different gross incomes yet still have the same operating incomes. So, this ratio can be misleading for those investors who do not adequately understand its limits.

Conclusion

The gross income multiplier is a good way to value commercial properties.

Investors can use this multiplier to compute an approximate sale or purchase price, which they can then compare to another property relative to the income it can produce.

Key Takeaways

• A gross income multiplier is a way of valuing an investment or commercial property like shopping centers and apartment buildings.
• The gross income multiplier is computed by dividing the sale price of a property by the gross annual rental income of the property.
• It is best if investors use other metrics in addition to GIM since it does not consider the operating costs of an income property.