Module 3&4 Flashcards
Capitalization
conversion of income to value 2 types direct capitalization & yield capitalization
direct capitalization
one income from 1 period (1 month, 1 year, etc.)
yield capitalization
when there is a series of income derived in the future over more than 1 time period (2yrs, 36 months, 10 years) that need to be discounted to present value
gross rent multiplier
the relationship between income and value; and can then be used to solve for value.
To find the GRM
divide the sale price/total monthly rent property
commercial properties
are always analyzed & valued on the basis of annual income, not monthly income
commercial properties
generally analyzed valued based on NET operating income, which includes deductions for vacancy & operating expenses rather than gross income (before deduction of vacancy & operating expenses rather than gross income (before deduction of vacancy & operating expenses) as in the case with 1-4 properties
commercial properties
5 or more familiar properties are generally analyzed on an annual basis (12 months).
NOI Comparables
Overall cap rate: NOI/sale price for the property
yield capitalization
same as discounted cash flow analysis
future $ brought to present
(present value)
present income stream + reversion = yield cap
concepts & principles that influence the income cap approach
*HBU
*anticipation+change
*supply & demand
*substitution
*balance
*exterrnalities
anticipation
value is the present worth of anticipated future benefits, such annual income plus the right to the proceeds of the sale of the property in the future
*needs comp sales or data
bundle of rights
ownership rights to remodel , lease, tear down subject to restrictions, e.g. zoning
fee simple estate - absolute ownership except for govt powers (taxation & eminent domain)
leased fee interest - ownership interest held by owner with rights of use and occupancy conveyed by lease to others
leasehold interest
interest held by lessee through lease transferring the rights of use & occupancy for a stated term under certain conditions
sublease
an agreement in which lessee in prior lease conveys right to use & occupy of a property to another sublesse.
sandwich lease
leaseholder is lessee of one property and the lessor of another
condominium
person holds fee simple interest in unit, an undivided interest in common areas jointly held
cooperative
shares equivalent to cooperate unit, exclusive of the prorata share of the blanket mortgage or mortgages
life estate
total rights of use, occupancy & control limited to lifetime of a designated party known as a life tenant
partial estate
divided or undivided in real estate that reps less than whole
market value
objective & reflects what investors in them mkt might do
investment value
the value to a particular investor; subjective
potential gross income
total income attributable to property at full occupancy before vacancy & operating expenses deducted
effective gross income
anticipated income from all operations of real estate after allowance is made for vacancy & collection of losses an addition is made for any other income.
net operating income
actual net income that remains after all operating expenses are deducted from eff gross income but before mortgage debt service & book depreciated are deducted
pre-tax cashflow
portion of net income (operating) NOI that remains after total mortgage debt service is paid but before income tax on operations deductions also before tax cash flow or equity dividend
after cash flow
portion of pre-tax cashflow that remains after tax deduction
reversion
lump sum benefit that an investor receives or expects to receive at the termination of an investment
rate of return
primary measurement of performance of real estate investments
ratio of income or yield
the original investment based on 1 year or over an entire projection period
return on capital plus profit
investors seeking recovery of the amount invested
annual income from investment/original investment = annual rate of return
overall rate cap
income rate for total property interest (land&building) reflects the relationship between single yr net operating income expectancy & total property price or value
equity cap rate
relationship between single yr’s pretax cash flow expectancy & equity value indication also called the cash rate, cash flow rate or equity dividend rate
yield concepts
interest rate - yield rate on debt capital
discount rate - interest rate used to convert future payments or receipts into present value
mortgage cap rate
ratio of the annual debt service to the principal amount of mortgage loan. ratio income to mortgage amount.
income cap formula
I=RxV; R=I/V; V=I/R
I/R=V
I=net operating income
R=overall rate
V=overall value
rate used in NOI is very specific type of rate: an overall rate of return which come from land & improvements
when using multipliers
VIF (value=income*factor)
Gross Rent Multiplier (GRM)
monthly multiplier & used residential property income approach for 1-4 SF residence, refers to rental income only
sales price/monthly rental income
GIM (gross income multiplier)
used in residential property with 5 or more units & in many commercial properties. Also used in sales comparison approach although its an income approach
Calculating GIM
sales price/gross annual income will reflect annual income to value
OER (operating expense rate)
ratio of total operating expenses to eff gross income (TOE/EGI)
complement of net income OER=1-NR
IRV (income cap formula)
est of two components (income & rate) in order to derive a property value
direct cap
convert 1 yr income est into value indication. This includes return on or return of investment capital
extract cap rate
from comparable sales. net income/sales price using IRV; I/V=R
