Income Approach

Question 1

Essentially, the income capitalization approach converts income into a lump sum indication of a property value. This can be done in one of two ways with two formulas:

Answer 1

1. the income can be divided by a rate;
   Value = Net Operating Income/ Rate
   or
2. the income can be multiplied by a multiplier.
   Value = Income X Multiplier

Question 2

What if the income was $48,543 and the appropriate capitalization rate was 12.4%. What is the value?

Answer 2

$391,476 ($48,543 /.124).

Question 3

A subject property has a net operating income (NOI) of $80,000. A comparable sale sold for $525,000, and it had a verified NOI of $65,000. What is the value of the subject?

Answer 3

The capitalization rate (Ro)is extracted from the comparable sale as follows:
Ro= I/ V
Ro= $65,000 / $525,000
Ro = .1238 (or 12.38%)

The indicated value of the subject property based on a Ro of 12.38% is calculated as follows:
V=I/ R
V = $80,000 / 0.1238 (or 12.38%)
V = $646,203 (or $646,000 rounded)

Question 4

Formula NOI

Answer 4

Gross Annual Rental (Potential Gross Income, or PGI)
+ Other Income
- Vacancy/Credit Loss (V&C)
= Effective Gross Income (EGI)
- Operating Expenses (TOE)
= Net Operating Income (NOI)

Question 5

A property is capable of generating $1,200 a month rent. GRM 90. What is the property value?

Answer 5

90 x $1,200 or $108,000.

Question 6

The subject property is a four-unit building, consisting of two 2-bedroom units and two 1-bedroom units. Through research and analysis, you estimate the market rents for the 2- bedroom units at $1,500 per month, and the 1-bedroom units at $1,100 per month. The market extracted GRM is 95. What is the indicated value for the subject property?

Answer 6

2x$1,500
plus
2x$1,100
= Total gross monthly rent= $5,200
Multiplying the monthly rent of $5,200 x 95 GRM
= $494,000 indicated value by the GRM
income approach.

Question 7

An apartment building had 12 units rented for $1,400 per month and 20 units rented for $1,600 per month. It sold for $3,000,000. What was the GIM?

Answer 7

5.1

Question 8

Formula Land Value via Surplus Productivity

Answer 8

Net Operating Income (NOI)
Minus Coordination (Management)
Minus Capital
Minus Labor
= Remaining NOI to Land
/ Land Capitalization Rate %
= Indicated Land Value $

Question 9

What is the value of the subject? Comparable sale price $225,000; Comparable net income annual: $18,000; Subject net income annual: $16,500.

Answer 9

$206,250

$225,000 = 100%
$18,000 = x
x = 8%

$16,500 = 8%
x = 100%
x = $206,250

Question 10

The relationship between the capitalization rate and the value is

Answer 10

inverse.

If the NOI is constant and the rate increases, the indicated value drops. Conversely, if the rate declines, the indicated value rises. Capitalization rates and values therefore have an inverse relationship.

Question 11

An investor requires a 10% rate of return to invest in a building. The building is expected to have a remaining economic life of 25 years. What is the appropriate building capitalization rate, using the straight-line method?

Answer 11

14%

First you need to find the recapture rate using the formula: 100%/years of useful life (or the remaining economic life??) = annual recapture rate.
100/25 = 4% recapture rate. Add this to the required return on investment of 10% to equal 14%.

Question 12

An office building is valued at $100,000 and has a net income of $10,000. If the net income remains the same, but the capitalization rate increases by one full percentage point, what would the estimate of value be?

Answer 12

$90,909

Net income/value = capitalization rate. $10,000/$100,000 = 0.10 or 10%. If the capitalization rate increases by 1%, then $10,000/0.11 = $90,909.

Question 13

An income-producing property has a capitalization rate of 10% and its property taxes increase by $400 per month. Which of the following is true of the property’s value?

Answer 13

It will decrease by $48,000

The $400 monthly tax increase must be annualized (multiplied by 12) and then capitalized. Since property taxes increase, the net operating income would decrease, and result in a loss of value by $4,800 divided by 0.10, which equals $48,000.

Question 14

You are appraising a residential property that has the following costs: Survey: $450; Appraisal fee: $450; Building permit: $475; Labor: $50,972; Materials: $97,632; Interim financing: $12,021; Real estate taxes: $481; Engineering fees: $3,100; Marketing: $5,100; Insurance: $900. What are the total indirect costs?

Answer 14

$22,502

Indirect costs are items that relate to the construction of the property; however, these items exclude labor, materials, and building permits. These items include professional fees, such as surveying, engineering and appraisal fees, as well as real estate taxes, etc. In this example, indirect costs include: $450 (survey) + $450 (appraisal fee) + $12,021 (interim financing) + $481 (real estate taxes) + $3,100 (engineering fees) + $5,100 (marketing) + $900 (insurance) = $22,502.

Question 15

You are appraising a residential property that has the following costs: Survey: $450; Appraisal fee: $450; Building permit: $475; Labor: $50,972; Materials: $97,632; Interim financing: $12,021; Real estate taxes: $481; Engineering fees: $3,100; Marketing: $5,100; Insurance: $900. What are the total direct costs?

Answer 15

$149,079

Direct costs relate directly to the property itself in regard to construction. Labor and materials are considered direct costs, as is the building permit. In this example, direct costs are: $50,972 (labor) + $97,632 (materials) + $475 (building permit) = $149,079.

Question 16

An income property recently sold for $300,000. The potential gross income was $40,400, the net operating income was $24,000, and annual debt service was $18,400. What was the indicated capitalization rate for this property?

Answer 16

0.08