Gross rent multiplier example

Suppose that there is a 5 unit residential property that sold for $500,000.  Each unit rents for $1000.  If you have to use the gross rent multiplier approach and the information provided then what would be the value of a similar property where each of the 5 units rents for $900 per month?

  1.  Only the seller
  2.  Only the buyer
  3.  Only from the principal
  4.  Either the seller or the buyer.

Because we are comparing 2 similar buildings, that means we can assume the gross rent multiplier for both buildings is the same.

So, let’s find out the gross rent multiplier for the first building:

Gross Rent = $1000 * 5 units = $5,000

Sales Price = Gross Rent Multiplier * Gross Rent

So, for the first building, we have:

$500,000 = Gross Rent Multiplier * $5,000

Which means that the Gross Rent Multiplier = $500,000/$5,000 = 100

Remember that we re-use the gross rent multiplier from the other building.

So, if the other building has a gross rent equal to $900 * 5 = $4500, and we know that Sales Price = Gross Rent Multiplier * Gross Rent – then the Sales Price would be 100 * 4,500, and the value of the other building is $450,000.