Income Approach

Question 1

Mortgage Constant

(Formula)

Answer 1

• ADS = Annual Debt Service
• M = Mortgage Constant

ADS / M = Mortgage Constant

Question 2

Basic 6 Steps of Income Approach

Answer 2

1. Estimate potential gross income (PGI) from all sources.
2. Deduct vacancy & collection losses to estimate the effective gross income (EGI).
3. Estimate stabilized total operating expenses (TOE).
4. Deduct TOE from EGI to estimate the net operating income (NOI).
5. Determine appropriate capitalization rate (OAR).
6. NOI / OAR = Value

Question 3

Return OF the Investment

Answer 3

The recapture of the investment at the end of the holding period.

Example: Proceeds from the sale of real estate.

Question 4

Return ON the Investment

Answer 4

The interest on the investment during the holding period.

Example: Proceeds from the interest of a loan.