How to Calculate a Gross Income Multiplier

How to Calculate a Gross Income Multiplier
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A gross income multiplier is a valuation tool you can use to compare the values of similar investment properties based on the rental income they generate. You can calculate the gross income multiplier of a property that has recently sold and use it to estimate the value of similar properties in the same area. Properties that are in the same area, are similar in size and have similar characteristics typically sell for similar gross income multipliers. A higher gross income multiplier suggests that buyers are willing to pay more for properties in that area.

Compare a Recent Comparable Sale

Find out the square footage and annual rental rate per square foot of a recently sold investment property for which you want to calculate a gross income multiplier. You may find this information from a property’s sale listing or from the real estate broker who handled the sale. For example, assume a recently sold property is 10,000 square feet and rents for $18 per square foot.

Calculate Potential Gross Income

Multiply the number of square feet by the rental rate per square foot to calculate the property’s potential gross income, which is the annual rental income it would generate if it were fully occupied. In this example, multiply 10,000 square feet by $18 per square foot to get $180,000 in potential gross income.

Find the Property's Sales Price

Determine the price for which the property sold. You can request this information from the real estate broker or find it in the public records at the recorder’s office in the county in which the property is located. In this example, assume the property sold for $1.44 million.

Calculate the Gross Income Multiplier

Divide the property’s sales price by its potential gross income to calculate its gross income multiplier. In this example, divide $1.44 million by $180,000 to get a GIM of 8. This means that the property sold for eight times its potential gross income. Other nearby properties that are similar to this one would likely sell for a similar gross income multiplier.

Find a Range of Multipliers

Calculate the gross income multiplier of several recently sold properties in an area to estimate a range of gross income multipliers with which you can compare a similar property.

Multiply the potential gross income of a property that you want to value by the gross income multiplier of a recently sold similar property to estimate its value.