California Real Estate Practice Exam

When real property is leased to various tenants, appraisers find it helpful to use a gross multiplier, which is founded upon:

1. Gross income as a function of capitalized value

2. Gross income as related to future net income

3. Gross income versus estimated gross income

4. Rental value versus the selling price of the property

The correct answer is: Gross income as a function of capitalized value

The reason why gross income as a function of capitalized value is the correct basis for using a gross multiplier in real property leasing is tied to the relationship between a property's income-generating potential and its overall market value. The gross multiplier is typically calculated by taking the property's purchase price or value and dividing it by the annual gross income it generates from rents. This ratio helps appraisers and investors quickly estimate a property's value based on the income it produces, making it a valuable tool in real estate analysis. By focusing on gross income and its connection to capitalized value, appraisers can assess whether the property is being leased at a fair rate relative to its market value or potential. This approach allows for a standardized method of comparing different income-generating properties, facilitating investment decisions and financial assessments. Understanding this relationship is essential for appraisers as they evaluate the effective income and forecast future performance based on established metrics within the market.