- Income multiplier.
An income multiplier is the business term referring to the formula that lenders use in order to determine how much money a prospective borrow can actually receive. It is deduced by multiplying the gross salary of the first applicant by three. This process is necessary in order to evaluate whether an individual is actually capable of paying back that amount of money along with interest.
Also, if the amount they are asking for is ludicrous in comparison to how much they earn, a lender will have to question their motives and intentions. It could be that they are asking for a loan out of greed rather than necessity and if they are absolutely desperate they may be unwilling to ever pay back the loan.
- Gross income multiplier
This is an approximate measure of how much value can be found within an investment property and is calculated with the formula: Property sale price/annual gross rental income. It is often used to find the profit value of real estate and other large corporations like malls, hotels and penthouses.
However, miscellaneous costs are not taken into account so produces a distorted view of its profitability. The true value could be much less once utility bills, tax and maintenance are included. Many business ventures have collapsed due to an entrepreneurs' inability to conduct the correct financial formulas.
- Net income multiplier.
This is a formula to measure the possible effectiveness an asset will be in its ability to generate a large amount of income when compared to its original market price. It is calculated by dividing the current price of a particular asset by how much net income it is able to produce in one certain time period. It is most often used with regards to properties for rent as bills are usually paid monthly.
