California Real Estate Practice Exam

What does the use of a gross multiplier in property appraisal imply?

1. A focus on gross income versus estimated gross income

2. A relationship between appraisal frequency and capitalization rate

3. A relationship between gross income and market value

4. A relationship between gross income and future net income

The correct answer is: A focus on gross income versus estimated gross income

In property appraisal, the concept of a gross multiplier is utilized to establish a correlation between a property's gross income and its market value. This method, often referred to as the Gross Income Multiplier (GIM), takes the total annual income a property generates (often through rent) and applies a multiplier to estimate the property's worth. The emphasis here is indeed on the relationship between gross income, which is the total income produced by the property before expenses, and the market value of the property. Appraisers and investors use this figure to make quick assessments of property value based on the income it generates, which can be particularly useful in evaluating investment properties. Thus, the answer focuses on how the gross multiplier provides insight into market value by leveraging gross income. Other options focus on different relationships or concepts that do not directly address how gross income relates to appraisal value, such as discussing capitalization rates or future net income, which are not central to the use of a gross multiplier. The core idea behind the gross multiplier reflects a straightforward calculation: higher gross income typically indicates higher market value, making it a practical tool for property appraisal.