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?
- Only the seller
- Only the buyer
- Only from the principal
- 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.