A list of 56 sales of apartment houses showing gross income multipliers arranged by intervals of 1.0. Note that the two intervals 5.00 to 5.99 and 6.00 to 6.99 have the greatest number of cases among the intervals. The median gross income multiplier is 6.04. The variation in gross income is accounted for by differences in the expenses of operation. An investor would normally pay more for an apartment showing an annual gross income of P100,000 with a 50 per-cent expense ratio (P50,000 annual net income) than for another apartment with the same gross income but with a 75 percent expense ratio (P25,000 annual net income). Expenses of operation are related to management efficiency, age of building, type of construction, and apartment type. Generally speaking, it would cost more to operate a 3G-year-old, 12-story apartment building than it would to operate a 2-year-old, 2-story garden court apartment project.
Because gross income multipliers vary according to variations in operating expense ratios, care must be taken to use gross income multipliers to value the kind of property typical of the properties used to calculate the gross income. If this condition is met, the gross income multiplier (1) provides another means of estimating value, (2) is easily obtained, (3) avoids the complexities of calculating net income, and (4) is widely used by investors brokers, and lenders as an initial estimate of market value.
If comparable properties are secured, the gross income multiplier may be used to estimate the overall capitalization rate. This assumes that each example has a representative, typical net income ratio. The net income ratio represents the annual net op2rating income expressed as a percent of gross possible income. A property showing an annual net operating income of P40,000 and an annual gross possible income of P100,000 would have a net income ratio of 40 percent. Given the net income ratio, the over-capitalization rate may be derived from the formula:Overall capitalization rate = Net income ratio______ Annual gross income multiplier
If the net income ratio is 0.53 and the annual gross income multiplier is 6.04, the overall capitalization rate is 8.78 percent (0.53/6.04).
Monthly Gross Income Multipliers
For single-family dwellings, the estimate of value is based on the monthly gross income multiplier. Sales prices of similar properties are related to the observed monthly rent. Provided that sufficient data are at hand, the relationship between monthly rents and value may be indicated by the market rent. For example, a property that sold for P75,000 and was formerly rented for P500 per month indicates a monthly gross income multiplier of 150. If the property appraised has an estimated monthly rent of P400, the monthly gross income multiplier would indicate a market value of P60,000 (P400 X 150).
I will be presenting a new method of appraisal next week called the cost approach which is quite different from what we have been taking up so far. This will be a long post, and I ask ever reader to take down notes on this one. Again, if you have any questions please post comments, have a great day!