Class 17 Flashcards
Capitalization is the process by which annual net operating income is used to…
estimate value
If a property’s annual net income is $24,000 and it is valued at $300,000 what is its capitalization rate/how do we find it?
Annual net income / value = CAP rate
$300,000 / $24,000 = CAP Rate
CAP Rate = 0.08, or 8%
What is a competitive market analysis
A CMA is a market study usually prepared by licensed agents which is used to help buyers and sellers determine purchase and list prices of property
A ___________ is used to find the amount of the adjustment for a particular attribute
paired sales analysis
The process of changing income into value
Capitalization
A rate that returns capital
Recapture
Gross income minus vacancy and expenses
Net income
Gross income minus vacancy
Effective gross income
Another name for a return rate
CAP Rate
approach used to find the value of commercial properties
income approach
Acronym for a rent multiplier
GRM
A fixed expense
Taxes
To find value, you _____ the net income by the cap rate
divide
In appraising, the word capitalization means to convert an income into a ______
value
there are two methods used to convert an income into a value with the Income Approach:
–Direct Capitalization
–Yield Capitalization
Explain the difference
Direct capitalization - value based on 1 year income
Yield capitalization - value based on income over a number of years
What is potential gross income
income earned if a property were 100% occupied
also other sources such as laundry and vending machines
Higher/Lower:
The ________ the CAP rate, the _____ the value
higher
lower
Contract rent is the rent that is obtained through….
present leases
Reserve accounts, which are fees set aside to replace items that typically wear out, is also called ________ accounts
sinking funds accounts
The income left after all expenses have been subtracted is called ____________
net operating income
A Cap rate is used to find the….
value of an income producting property
A ______ is built into a cap rate to recover capital invested
Recapture rate
To find value using the income approach, an appraiser divides the net income by a _______
cap rate
A gross rent multiplier may be used to find the value of….
small residential property
A gross income multiplier is used to find the value of….
small commercial income property
A capital gain in the profit made from the…..
sale of real estate
What is the exclusion for capital gain?
A homeowner who files single taxes does not have to pay any capital gain taxes on the first $250,000 of profit if they have lived in the property for 2 of 5 years.
A homeowner who files joint taxes does not have to pay any capital gain taxes on the first $500,000 of profit if they have lived there for 2 of 5 years
A homeowner may reduce taxable income by deducting _______ and ________
interest
taxes
**A homeowner may NOT deduct expenses such as plumbing repairs
CAP Rate = NOI / Sale Price
If the income of property remains the same, a decrease in a cap rate would _______ the property’s value, while an increase in the rate would ________ the property value
increase
decrease
CAP Rate equals…
NOI / sale price
The Gross Rent Multiplier is used to estimate the value of what kind of property and what kind of income?
small residential properties of four units or less
rental income only
The Gross income multiplier (GIM) is used for what kind of properties?
Commercial properties (because they may produce income other than rent)
Formulas for GRM and GIM
GRM * Monthly rent = value
- expenses are not considered when doing the GRM
GIM * yearly INCOME = value
**yearly income could be rent plus any other income
How do you find the multiplier for GRM or GIM
Use comparable properties
Sale price / monthyl rent = multiplier
A recapture rate is built into capitalization rate to compensate the owner for:
capital recovery
How do you find the effective gross income of a property
EGI = gross income - vacancy rate
or
EGI = net income + expenses
An appraiser who is gathering information regarding operating expenses would not be concerned with….
debt service
As a general rule, when the net income of a property remains constant, an increase in a cap rate would:
decrease the value of the property
When an appraiser subtracts the expenses from the effective gross income, the appraiser is seeking the….
net income
