Effective Gross Income Multiplier (EGIM)
The effective gross income multiplier (EGIM) is a ratio used to estimate the market value of an investment property by comparing its sale price to its effective gross income. It is calculated by dividing the sale price of the property by its effective gross income, which is the property’s potential gross income minus vacancy and collection losses. (PropertyMetrics, Investopedia)
Importance of EGIM
The EGIM is a useful metric for investors and real estate professionals to determine if a property’s asking price is a good deal. A low EGIM means that the property is being sold for a lower multiple of its effective gross income, which may indicate that it is a good investment opportunity. (PropertyMetrics, Investopedia)
Limitations of EGIM
However, it is important to note that the EGIM does not take into account operating costs such as utilities, taxes, maintenance, and vacancies. Therefore, it should not be used as the sole valuation metric for comparing investment properties. To make a more accurate comparison, investors should use the net income multiplier (NIM), which factors in both income and operating expenses. (PropertyMetrics, Investopedia)
Calculation of EGIM
The formula for calculating the EGIM is as follows:
Key Facts
- Definition: The effective gross income multiplier (EGIM) is a ratio that is calculated by dividing the sale price of a property by its effective gross income.
- Calculation: To calculate the effective gross income multiplier, divide the sale price of the property by its effective gross income. The resulting ratio represents how many times the effective gross income the property is being sold for.
- Importance: The effective gross income multiplier is used as a rough measure of the value of an investment property. It helps investors and real estate professionals determine if a property’s asking price is a good deal by comparing the gross income it generates to its market value.
- Limitations: The effective gross income multiplier does not take into account operating costs such as utilities, taxes, maintenance, and vacancies. Therefore, it should not be used as the sole valuation metric for comparing investment properties. To make a more accurate comparison, investors should use the net income multiplier (NIM), which factors in both income and operating expenses.
EGIM = Sale Price / Effective Gross Income
For example, if a property has a sale price of $1,000,000 and an effective gross income of $100,000, the EGIM would be 10. This means that the property is being sold for 10 times its effective gross income. (PropertyMetrics, Investopedia)
Conclusion
The EGIM is a useful tool for valuing investment properties, but it is important to be aware of its limitations. By using the EGIM in conjunction with other valuation methods, investors can make more informed decisions about potential investments. (PropertyMetrics, Investopedia)
Sources
- Gross Income Multiplier: A Calculation Guide – PropertyMetrics
- Gross Income Multiplier (GMI): Definition, Uses, and Calculation – Investopedia
- Lesson 9 – Multipliers: Derivation and Valuation (The Income Approach to Value) – California State Board of Equalization
FAQs
What is the effective gross income multiplier (EGIM)?
The effective gross income multiplier (EGIM) is a ratio that is calculated by dividing the sale price of a property by its effective gross income.
How is the effective gross income multiplier calculated?
The EGIM is calculated by dividing the sale price of the property by its effective gross income. The effective gross income is the property’s potential gross income minus vacancy and collection losses.
What is the purpose of the effective gross income multiplier?
The EGIM is used to estimate the market value of an investment property by comparing its sale price to its effective gross income.
What are the limitations of the effective gross income multiplier?
The EGIM does not take into account operating costs such as utilities, taxes, maintenance, and vacancies. Therefore, it should not be used as the sole valuation metric for comparing investment properties.
How can the effective gross income multiplier be used?
The EGIM can be used by investors and real estate professionals to determine if a property’s asking price is a good deal. A low EGIM may indicate that the property is a good investment opportunity.
What is a good effective gross income multiplier?
A good EGIM will vary depending on the market and the type of property. However, a general rule of thumb is that an EGIM of 10 or less is considered to be a good value.
How does the effective gross income multiplier differ from the gross income multiplier?
The EGIM is calculated using the effective gross income, which is the potential gross income minus vacancy and collection losses. The gross income multiplier (GIM) is calculated using the potential gross income without deducting vacancy and collection losses.