Part 4 Vocab

Question 1

the ratio between the sale price (or value) of a property and it’s effective gross income

Answer 1

Effective gross income multiplier (EGIM)

Question 2

a ____ is a multiplier used instead of a capitalization rate when an appraiser is employing the VIF formula to capitalize income. It’s actually a reciprocal of cap rate. A ___ is typically greater than 1 when a cap rate is typically less than 1.

Answer 2

Factor

Note: Any factor can be converted to a rate by taking its reciprocal (R = 1 / F), but this derived capitalization rate (R) is not an overall rate (RO) unless the associated income is based on NOI

Ex: If a capitalization rate (R) is 6.25%, what is its
corresponding factor? The answer can be found by taking the reciprocal of 6.25%.
1 / 0.0625 = 16, so 16 is the factor that corresponds to a
capitalization rate of 6.25%, and the reciprocal of 16 is 6.25% (that is, 1 / 16 = 0.0625).

Question 3

The formula in direct capitalization used with NOI.

Answer 3

IRV = Income over Rate and Value. So:
I = R x V
R = I / V
V = I / R

NOTE: Remember NOI is used to calculate this and Overall Rate is the rate. Always used with commercial properties (residential uses VIF)

Question 4

The formula used to capitalize income for effective gross income or potential gross income. (Occasionally NOI). Can be used for residential properties or commercial.

Answer 4

VIF = Value over Income and Factor
V = I x F
I = V / F
F = V / I

NOTE: PGI or EGI are used to calculate this

Question 5

___ are not divided into income but instead are used to multiply the income to derive a value. They are identified with the type of income applied in the formula.

Answer 5

Multiplier

Note: PGIM is connected with PGI, EGIM is used with EGI, and NIM (net income multiplier) is connected with NOI when used in the VIF formula.

Question 6

the multiplier used in less complex properties like 1-4 unit residential properties and it applies to rental income only.

Answer 6

Gross rent multiplier (GRM)

Note: Uses the VIF formula
The GRM selected for the subject is the result of reconciling GRMs extracted from sales most similar to the subject property. The MONTHLY rent is used for this multiplier.

Question 7

the multiplier used in residential properties with 5+ units and in some commercial properties as a method of direct capitalization. Can also include income from non-rental sources. ex: income from laundry, vending, or parking.

Answer 7

Gross Income Multiplier (GIM)

Note: Uses the VIF formula
Derive it by dividing the sales price of comps by their annualized gross income.

Question 8

the ratio of total operating expenses to effective gross income. The complement of the net income ratio.

Answer 8

operating expense ratio (OER)

TOE/EGI
OER = 1 - NIR

Question 9

the ratio between the sales price (or value) of a property and it’s potential gross income

Answer 9

potential gross income multiplier (PGIM)

Question 10

How does an appraiser decide whether to use IRV or VIF?

Answer 10

it’s largely determined by the type of property and the availability of market data. If good data on income and expenses for the subject, IRV is used. In some property types, PGI or EGi would be the most accurate indicator so VIF is chosen.

Question 11

a ratio of one year’s NOI provided by an asset to the value of the asset

Answer 11

Capitalization Rate (R)

Note: used to convert income into value through direct capitalization