What is the Gross Multiplier?

The Gross Multiplier is best described as:

  1.  A ratio used to quickly obtain an estimate of value in the income approach
  2.  A ratio between net income and gross sales
  3.  A ratio
  4.  A ratio used in the cost approach to determining value

Appraisers have designed a method for quickly obtaining a rough estimate of value using what are called gross monthly rent multipliers (GMRM), also known as gross rent multipliers (GRM), if annual rents, instead of monthly rents, are used. A gross multiplier is a ratio between sales price and rental rates. The gross monthly rent multiplier is found by dividing the sales price of a home by its monthly rent.

Example

Sales Price

Monthly rental rate

$300,000 $2,000         = 150 Gross monthly

rent multiplier

The gross rent multiplier is found by dividing the sales price of a home by it annual rent.

Sales Price      $300,000 = 12.5 Gross rent Annual rate        $24,000           rent multiplier ($2,000/mo. × 12)

An appraiser does this for many sales until a trend develops. When asked to conduct an appraisal on a home, the appraiser does a com- plete market approach (comparable sales) to arrive at an estimate of value. To recheck the results of the market approach, the appraiser may also do a cost approach and an income approach. For a home, a full-blown income approach is not needed, so the gross rent multiplier approach is often used instead.

The appraiser locates comparable homes, determines their gross multipliers, and selects the most appropriate multiplier. Next, the appraiser determines the fair market rent of the subject home. Then

9.3 Appraisal Methods            289290

Chapter 9

Real Estate Appraisal

the gross multiplier is multiplied by the fair market rent to arrive at an estimate of value.