Part 1 Introduction to the Income Capitalization Approach

Question 1

What is the Economic Principle for: The perception that value is created by the expectation of benefits to be derived in the future.

Answer 1

Anticipation

Question 2

What are examples of the Economic Principle: Anticipation

Answer 2

Projected market and contract rents
􏰀 Converting income into value

Question 3

What Economic Principle is: The principle that economies outside a property have a positive effect on its value while diseconomies outside a property have a negative effect on its value.

Answer 3

Externalities

Question 4

What Economic Principle is: The result of the cause and effect relationship among the forces that influence real property value.

Answer 4

Change

Question 5

What examples are for the Economic Principle: Externalities:

Answer 5

􏰀 Market rents
􏰀 Vacancy rates
􏰀 Market expenses
􏰀 Converting income into value

Question 6

What examples are of the Economic Principle: Change

Answer 6

Vacancy rates
Converting income into value

Question 7

What Economic Principle is: The appraisal principle that states that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution. This is the primary principle upon which the cost and sales comparison approaches are based.

Answer 7

Substitution

Question 8

Examples of the Economic Principle: Substitution

Answer 8

􏰀 Market rents
􏰀 Market expenses
􏰀 Converting income to value

Question 9

What Economic Principle is: The concept that the value of a particular component is measured in terms of the amount it adds to the value of the whole property or as the amount that its absence would detract from the value of the whole.

Answer 9

Contribution

Question 10

What Economic Principle examples are for Contribution:

Answer 10

Land and building to the whole

Question 11

What Economic Principle is: The price of real property varies directly, but not necessarily proportionately, with demand and inversely, but not necessarily proportionately, with supply.

Answer 11

Supply and demand (as it relates to real estate)

Question 12

What are the examples of the Economic Principle: Supply and Demand (as it relates to real estate)

Answer 12

􏰀 Market rents
􏰀 Vacancy rates
􏰀 Market expenses
􏰀 Converting income to value

Question 13

What Is Capitalization?

Answer 13

Capitalization is the conversion of income into value.

Question 14

What is Capitalization rate

Answer 14

􏰀 Used to convert a single year’s income into value.

􏰀 Also called cap rates, all capitalization rates are abbreviated with the
letter R, and that’s the only concept where we will use the letter R.

Question 15

What is Multiplier

Answer 15

􏰀 Used to convert a single year’s income into value.
􏰀 Sometimes called a factor, and often abbreviated with the letter F or the letter M, a multiplier is the ratio between the sale price (or value) of a property and its potential gross income, its effective gross income, or infrequently, its net income.
􏰀 A capitalization rate is calculated with value or sale price in the denominator, and a multiplier has value or sale price in the numerator, but they both convert a single year’s income into value.

Question 16

The two general methods of capitalization are xx x xx

Answer 16

direct and yield.

Question 17

Direct capitalization

Answer 17

A method used to convert an estimate of a single year’s income expectancy into an indication of value in one direct step, either by dividing the net income estimate by an appropriate capitalization rate or by multiplying the income estimate by an appropriate factor. Direct capitalization employs capitalization rates and multipliers extracted or developed from market data. Only one year’s income is used. Yield and value change are implied, but not explicitly identified

Question 18

The general direct capitalization formula that uses a capitalization rate is

Answer 18

I/R=V
where I is income and V is value.

Variables below the horizontal line (rate and value) are multiplied together to get the variable above the horizontal line (income), or a variable
below the line (e.g., rate) should be divided into the upper variable (i.e., income) to achieve the remaining variable (value). This formula and its reconfigurations when solved for R or I, are often referred to as “IRV.”

Question 19

1.2 Example—Potential Gross Income Multiplier: What is the value of a property with a $100,000 potential gross income and a potential gross income multiplier (PGIM) of 4.0?

Answer 19

V=I×M
= $100, 000 × 4.0 = $400,000

Question 20

x x also has two related applications, both involving multiple years’ income.

Answer 20

Yield capitalization

(A method used to convert future benefits into present value by
1) discounting each future benefit at an appropriate yield rate or
2) developing an overall rate that explicitly reflects the investments income pattern, holding period, value change, and yield rate.)

Question 21

A method used to convert an estimate of a single year’s income expectancy into an indication of value in one direct step, either by dividing the net income estimate by an appropriate capitalization rate or by multiplying the income estimate by an appropriate factor.

Answer 21

Direct capitalization

Question 22

A rate used to convert income into value.

Answer 22

Capitalization rate

Question 23

A method used to convert future benefits into present value by (1) discounting each future benefit at an appropriate yield rate, or (2) developing an overall rate that explicitly reflects the investment’s income pattern, holding period, value change, and yield rate.

Answer 23

Yield capitalization

Question 24

Capitalization

Answer 24

The conversion of income into value.

Question 25

The perception that value is created by the expectation of benefits to be derived in the future.

Answer 25

Anticipation

Question 26

What symbols are used for the following?
Yield rate
Value
Income
Capitalization rate

Answer 26

Yield rate Y
Value V
Income I
Capitalization rate R

Question 27

A small retail property has a net operating income of $250,000 and the appropriate capitalization rate is 8%.
a. Should direct or yield capitalization be used to solve this problem?
b. What formula or drawing should be used in this problem?
e. What is the value of the property?

Answer 27

a. Direct capitalization
b. I/R = V
e. 250000 enter
0.08/
= 3,125,000