California Real Estate Practice Exam

"Gross multiplier" is used to determine the value of certain types of income properties. It is determined by:

1. Dividing the gross rental income by the appraised value

2. Dividing the sales price by the gross monthly rental

3. Multiplying the gross monthly rental by a reasonable cap rate

4. Multiplying the market price by the capitalization rate

The correct answer is: Dividing the gross rental income by the appraised value

The concept of "gross multiplier" refers to a method used primarily in real estate to estimate the value of income-producing properties based on their rental income. To arrive at this multiplier, one divides the sales price of a property by its gross rental income, typically calculated on a monthly basis. This method is commonly applied in situations where properties generate rental income, such as apartments or commercial spaces. By focusing on the relationship between the sales price and the income generated, investors and appraisers can establish a benchmark for valuation, which helps in determining whether a property is fairly priced relative to its income potential. The correct approach emphasizes that the sales price is divided by the gross monthly rental income to derive the gross rent multiplier (GRM). The GRM can then be used to estimate the value of other similar properties by multiplying the GRM by their respective gross rental incomes. This understanding is crucial for real estate professionals as it provides a straightforward formula to assess investment opportunities within the rental market, helping to gauge potential returns and inform purchase decisions.