GROSS INCOME MULTIPLIER

The Gross Income Multiplier (GIM) or Gross Rent Multiplier indicates how many times the price/value of the property is greater than the gross income it delivers to its owner. This measure along with many real estate investment performance measures is discussed in the e-book titled "Real Estate Investment Mathematics"

It should be noted that there are two concepts of gross income in the real estate industry, the Potential Gross Income (PGI) and the Effective Gross Income (EGI), which are of course calculated in a differnt way. Within this context, there are also two respective multipliers that involve a property's gross income, the Potential Gross Income Multiplier (PGIM) and the Effective Gross Income Multiplier (EGIM).

The formula for EGIM is the following:

EGIM = Market Price / Effective Gross Income (EGI)

The formula for the Effective Gross Income (EGI):

EGI = Potential Gross Rental Income + Other Income – Vacancy & Bad Debt Allowance

It is more meaningful to calculate the EGIM on an annual basis and thus the annual Effcective Gross Income is typically used in this formula. If a monthly EGIM is desired then the monthly EGI should be used.

Notice that the Potential Gross Income in the EGI formula includes primarily rental income, but it accounts also for any other income that may be produced by the property, such as income from vending machines, laundry room, parking, etc. The vacancy accounts for space/units that remain vacant during the year and, as such do not actually provide any rental income to the landlord, while bad debt allowances cover any rent that is owed during the year but is not paid by the tenants with valid contracts.

Example

Below we provide an example of calculation of effetive gross income and the respective annual EGIM.

Potential Gross Rental Income = $125,000
Vacancy and Bad Debt Allowance (8%) = $10,000
Other Income = $5,000
Market Price = $1,000,000

Therefore,

Effective Gross Income = 125,000 + 5,000 – 10,000 = 120,000

and therefore

EGIM = 1,000,000/120,000 =8.33

Thus, in this example, the asking price is 8.33 times greater than the effective gross income produced by the property.

The formulas for the PGIM and PGI are .....

Note: This is an excerpt from the e-book titled "Real Estate Investment Mathematics"

Real Estate Investment Mathematics!
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Internal Rate of Return(IRR)
The 3 Formulas for Modified IRR (MIRR)/Financial Management Rate of Return (FMRR)
Potential Gross Income Multiplier (PGIM)
Potential Gross Income
Effective Gross Income Multiplier
Effective Gross Income
Net Income Multiplier
Net Operating Income
Overall Capitalization Rate/Income Return
Capitalization Factor
Band-of-Investment Formula for Estimating a Market/Required Capitalization Rate
Theoretical-Approach Formula for Estimating a Market/Required Capitalization Rate
Appreciation Return
Total Return
Return on Total Capital (ROR)
Return on Equity (ROE)/Cash-on-Cash Return/Equity Dividend Rate
Before Tax Equity Cash Flow (BTECF)
Equity Investment
Loan Amount
Debt Service
Mortgage Constant
Payback Period
Breakeven Occupancy
After Tax Cash Flow (ATCF)
Taxable Income
One-Period IRR
Income Tax Payment in Association with Income Producing Property
Capital Gains
Formula for Cash Flow for Last Period of Analysis
Future Resale Price
Annual Rental Income of Occupied Multi-Tenant Property
Multi-Period Lease Rate Growth Formula with Intertemporally Variable CPI Forecast
Multi-period Lease Rate Growth Formula with Constant CPI Forecast
Present Value (PV)
Net Present Value (NPV)
Profitability Index

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