Gross income multipliers (GIM) are used to establish a rough estimate of the value of an investment property. Also known as the gross rent multiplier, the GIM is found using the ratio of sale price to gross operating income. The gross operating income reflects the annual rental income collected from all occupied units as well as income from other sources (laundry facilities, charges for parking etc). The GIM, synonymous with effective gross income used by appraisers, can either be a yearly or monthly ratio but is most typically yearly. It is a helpful tool to provide on the spot assessment before more detailed reports are made. This multiplier can help phase out weaker investment options, allowing more clarity for those better properties. The GIM is helpful when commercial properties do not have sufficient detailed market profiles, if precise rental numbers are unavailable for comparable properties as well if rental information is not readily available due to some other obstacle (seller’s guarding information for perspective buyers only).
The formula for the GIM is; Sale Price ÷ Gross Operating Income
*GOI is required
Although the GIM is a quick assessment tool, some points of caution need to be advised when employing this calculation. The GIM assumes the properties being compared are of high comparability. This method also assumes that the rental income has been calculated in a similar fashion. This calculation does not take into account external expenses, such as; operating expenses, taxes and debt service. In order to assure reliable results, comparable income data must be used.
Example. Jim is considering buying an investment property listed at $897,500.00 with a gross operating income of $97,231. To find the GIM,
897,500 ÷ 97,231 = 9.23
This would indicate that the property will sell for 9.23 times its operating income.