Income Approach Flashcards
What is needed to use the investment method?
An income stream.
What is capitalised to produce a capital value?
Rental income
What does the conventional investment method assume regarding growth?
It is implicit.
Where is an implied growth rate derived from in the conventional investment method?
The yield (market capitalisation rate).
How is market value calculated in the conventional investment method?
Rent received or market rent x years purchase.
What comparables are important for the conventional investment method?
Rent and yield.
What is the term and reversion method used for?
Reversionary investments (where market rent is more than passing rent).
How is a term and reversion valuation done?
Term is capitalised until review/expiry.
Reversion to market rent valued into perpetuity at an ARY.
When is the hardcore method used?
Over rented investments (passing rent more than market rent).
How is the income flow divided up in the hardcore method?
Horizontally
What does the bottom slice represent in the hardcore method?
Market rent
What does the top slice represent?
Rent passing less market rent.
What is applied to the top slice to reflect the additional risk?
Higher ARY
How are yields selected in the hardcore method?
Based on comparable investment evidence ad relative risk.
What is the formula for PV?
1/ (1+i)^n
