Since the effective gross income multiplier (EGIM) measures the price per current dolar of EGI, a larger EGIM indicates a better investment opportunity. (True/False) True False Question 10 (4 points) Given the following information, calculate the potential gross income multiplier (PGIM) for the specific investment: potential gross income:
18,750; acquisition price: $520,000; equity investment: 20%. (Multiple Choice) 5.25 8.32 10.5 27.7
The Correct Answer and Explanation is:
Question 1:
Statement: Since the effective gross income multiplier (EGIM) measures the price per current dollar of EGI, a larger EGIM indicates a better investment opportunity.
Answer: False
Question 2:
Given:
- Potential Gross Income (PGI): $18,750
- Acquisition Price: $520,000
- Equity Investment: 20% (this is not needed to compute PGIM)
PGIM Formula:PGIM=Acquisition PricePotential Gross Income\text{PGIM} = \frac{\text{Acquisition Price}}{\text{Potential Gross Income}}PGIM=Potential Gross IncomeAcquisition PricePGIM=520,00018,750=27.73\text{PGIM} = \frac{520,000}{18,750} = 27.73PGIM=18,750520,000=27.73
Answer: 27.7
Explanation:
In real estate investment analysis, income multipliers are often used as rough indicators to compare properties. The Potential Gross Income Multiplier (PGIM) is one such metric that expresses the relationship between the property’s potential gross income and its acquisition price. It is calculated by dividing the total acquisition price by the property’s potential gross income (PGI).PGIM=Acquisition PricePotential Gross Income (PGI)\text{PGIM} = \frac{\text{Acquisition Price}}{\text{Potential Gross Income (PGI)}}PGIM=Potential Gross Income (PGI)Acquisition Price
Potential Gross Income (PGI) represents the total rental income a property could generate if it were fully leased at market rent, with no deductions for vacancies or collection losses. It reflects the income-generating capacity of the property under ideal conditions.
Using the data provided:
- PGI = $18,750
- Acquisition Price = $520,000
PGIM=520,00018,750=27.73\text{PGIM} = \frac{520,000}{18,750} = 27.73PGIM=18,750520,000=27.73
This means that the investor is paying $27.73 for every $1 of potential gross income generated by the property. Generally, a lower PGIM is preferred because it indicates the investor is paying less per dollar of income, suggesting a better value or higher return potential. Conversely, a higher PGIM suggests the property is relatively expensive compared to its income potential.
It’s important to note that while PGIM provides a quick comparison tool, it does not account for operating expenses, vacancy rates, or financing costs. Therefore, it should not be used in isolation. More comprehensive analyses, such as net operating income (NOI), capitalization rate (cap rate), and cash-on-cash return, should supplement the decision-making process.
In conclusion, the correct PGIM is 27.7, and this high multiplier would typically signal a less attractive investment unless justified by low expenses or exceptional future income potential.
