What Is a Gross Income Multiplier (GIM)?

A gross income multiplier (GIM) is a rough measure of the value of an investment property. It is calculated by dividing the property's sale price by its gross annual rental income. Investors can use the GIM—along with other methods like the capitalization rate (cap rate) and 澳洲幸运5官方开奖结果体彩网:discounted cash flow method—to value 澳洲幸运5官方开奖结果体彩网:commercial real estate propert🀅ies like shopping centers and apartment complexes.

Understanding the Gross Income Multiplier (GIM)

Valuing an investment property is important for any investor before signing the real estate contract. But unlike other investments—like stocks—there's no easy way to do it. Many professional real estate investors believe the income generated by a property is much more important than its 澳洲幸运5官方开奖结果体彩网:appreciation.

The gross income multiplier is a metric widely used in the real estate industry. It can be used by investors and real estate professionals to make a rough determination whether a property's asking price is a good deal—just like the 澳洲幸运5官方开奖结果体彩网:price-to-earnings (P/E) ratio can be used to value companඣies in t🃏he stock market.

Multiplying the GIM by the property's gross annual income yields the property's value or the price for which it should be sold. A low gross income multiplier means that a property may be a more attractive investment because the gross income it generates is muc♋h higher than its market value.

Special Considerations

A gross income multiplier is a good general real estate metric. But there are limitations because it doesn't take various factors into account including a property's 澳洲幸运5官方开奖结果体彩网:operating costs including ut𓃲ilities, taxes, maintenance, and vacancies. For the same reason, investors shouldn't use the GIM as a way to compare a potential investment property to anoth🌱er, similar one. In order to make a more accurate comparison between two or more properties, investors should use the net income multiplier (NIM). The NIM factors in both the income and the operating expenses of each property.

Drawbacks of the GIM Method

The GIM is a great starting point for investors to value prospective real estate investments. That's because it's easy to calculate and provides a rough picture of what purchasing the property can mean to a buyer. The gross income multiplier is hardly a practical valuation model, but it does offer a 澳洲幸运5官方开奖结果体彩网:back of the envelope starting point. But, as mentioned abꦺove, there are limitations andꦺ several key drawbacks to consider when using this figure as a way to value investment properties.

A natural argument against the multiplier method arises because it’s a rather crude valuation technique. Because changes in 澳洲幸运5官方开奖结果体彩网:interest rates—which affect discount rates in the time value of money calculations—sources, revenue, and expenses are not explicitly considered.

Other drawbacks include:

• The GIM method assumes uniformity in properties across similar classes. Practitioners know from experience that 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网: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.

Example of GIM Calculation

A pꦉroperty un♚der 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.

This comparable—or comp as is it often called in practice—sold for seven times (7x) its effective gross. Using this multiplier, we see this property has a capital value of $350,000. This is found using🧸 the following formula:

V = GIM x EGI

7 x $50,000 = $350,000.

The Bottom Line

The gross income multiplier is a simple metric for comparing the relative profitability of different buildings. It is measured as the annual potential income from a given property, expressed as a percentage of its total value. Although it's convenient for rough calculations, the GIM does not account for operational expenses and other factors that would affect the actual profitability of an investment.