The gross income multiplier evaluates the property valuation related to commercial real estate, shopping centers, apartments for rent, etc. It is mainly calculated as per the ratio of the current valuation of the investment or property to its earned gross annual income. That is why the gross income multiplier is the only ratio with the current value and is also annualized for the property and investment required to be sold off.
To discuss this term in detail, a gross income multiplier or GIM is the rough measurement of the value of any investment property. It is calculated by dividing the whole property sale price by the gross annual rental income. Any investor can use the GIM and other capitalization or cap rate and discounted cash flow methods to value commercial real estate properties like shopping centers and apartment complexes.
Giving a particular valuation to the investment property is very important for investors before signing the real estate contract. But unlike other investments like stocks, there is no easy way to deal with it. Many professional real estate investors have faith that the income that is generated by the property is more important than the appreciation.
This GIM is a metric widely used in the real estate industry. Real estate professionals and investors can use this to decide the rough determination for the property while asking for a good deal. It is just like the price-to-earnings ratio used to evaluate the companies in the stock market.
When you multiply the GIM by the property gross annual income, it yields the property price for which it is to be sold. It is a low gross income where the multiplier means that the parcel may be a more attractive investment as gross income is involved.
The GIM is a starting point for the investors to value the perspective of the real estate investments. It is straightforward to calculate and provide a rough picture of what it means while purchasing the property to the buyer. The gross income multiplier is a practical valuation model but has some drawbacks.
• This method assumes uniformity in properties across similar classes. However, here the practitioners know that similar properties' expense ratios may vary because of the property manager maintenance, property age, and quality.
• A GIM fails to account for the leftover economic life of the comparable properties. While ignoring the remaining ginger, a practitioner can assign the equal values of the 50-year-old-property to a new one, assuming that they generate similar incomes.
