California Real Estate Practice Exam

In appraising a three unit dwelling to analyze its income, which approach is used?

1. Income approach

2. Gross rent multiplier approach

3. Cost approach

4. Sales comparison approach

The correct answer is: Gross rent multiplier approach

The gross rent multiplier approach is particularly relevant when appraising income-generating properties like a three-unit dwelling. This method involves determining the value of the property based on its rental income potential. It is calculated by taking the property's sale price and dividing it by its gross annual rental income, resulting in a multiplier. This figure can then be applied to similar properties to estimate value based on their income, making it a practical tool for investors looking at potential cash flow. In the context of a three-unit dwelling, this approach is effective because it directly relates to the income the property can generate from its tenants. This emphasizes the investment potential of the property rather than just its market value or construction costs. While other appraisal methods, such as the income approach and the cost approach, may also evaluate income-generating properties, the gross rent multiplier is specifically tailored for quick comparison based on income. The sales comparison approach, on the other hand, would lean more towards comparing sales of similar properties rather than focusing on the income potential, which is the primary interest in this scenario.