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What is the income capitalization approach, and how does it rely on the principle of anticipation?
What is the difference between market (economic) rent, scheduled (contract) rent, and historical rent?
How is effective gross income (EGI) calculated, and why is it important in the income approach?
What are the three main categories of operating expenses, and how do they impact net operating income (NOI)?
What is the gross rent multiplier (GRM), and how is it used for single-family residences?
Below are two common multipliers used in the income approach. Choose one and explain how it is applied in valuation:
- Gross Income Multiplier (GIM)
- Gross Rent Multiplier (GRM)

A small apartment building generates the following income:

Monthly Potential Gross Income (PGI): $12,000
Vacancy and Collection Losses: 5% of PGI
Annual Operating Expenses: $40,000
A Comparable Property recently sold for $900,000 and has a monthly gross rent of $10,000

Calculate the Effective Gross Income (EGI).
Determine the Net Operating Income (NOI).
Calculate the Gross Rent Multiplier (GRM) using the comparable sale.
- Formula:
Estimate the subject propertys value using the GRM.
- Formula:

Step	Formula / Calculation	Student Answer	Hint
Potential Gross Income (PGI)	$12,000 12 months	__________	Multiply monthly rent by 12
Vacancy & Collection Losses (5% of PGI)	PGI 0.05	__________	Multiply PGI by 5% (0.05)
Effective Gross Income (EGI)	PGI – Vacancy Losses	__________	Subtract vacancy losses from PGI
Operating Expenses	Given: $40,000	__________	This value is provided
Net Operating Income (NOI)	EGI – Operating Expenses	__________	Subtract operating expenses from EGI
Comparable Sale Price	Given: $900,000	__________	This value is provided
Comparable Monthly Gross Rent	Given: $10,000	__________	This value is provided
Gross Rent Multiplier (GRM)	Comparable Sale Price Comparable Rent	__________	Divide Comparable Sale Price by Comparable Monthly Rent
Estimated Property Value (GRM Method)	GRM Subjects Monthly Rent ($12,000)	__________	Multiply GRM by Subject’s Monthly Rent

Key Definitions:

Potential Gross Income (PGI): The total income a property could generate if fully rented with no vacancies or losses.
Vacancy & Collection Losses: The estimated percentage of PGI lost due to vacant units or unpaid rent.
Effective Gross Income (EGI): The actual income a property earns after subtracting vacancy losses.
Operating Expenses: Costs required to maintain and operate the property (e.g., maintenance, management, taxes).
Net Operating Income (NOI): The remaining income after operating expenses are deducted from EGI.
Gross Rent Multiplier (GRM): A ratio used to estimate property value based on gross rental income.
Formula for GRM:
$GRM = Comparable Monthly Rent Comparable Sales Price$
Formula for Estimating Property Value Using GRM:

Helpful Tips:

If GRM is higher, the property is more expensive relative to rent.
If GRM is lower, the property may be undervalued or have higher rent potential.
Always verify comparable properties to ensure accurate GRM application.
Concept Overview:

The Income Capitalization Approach is used to value income-producing properties by converting net operating income (NOI) into a property value estimate. This method is based on the principle of anticipation, which assumes that investors purchase properties for their future income potential.There are two common methods used:
- Direct Capitalization Method Uses a single years stabilized NOI and a Gross Rent Multiplier (GRM) or Capitalization Rate (Cap Rate) to estimate property value.
- Yield Capitalization Method Considers multiple years of projected income and applies discounting techniques.

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