Part 3 Intro to income capitalization

Question 1

The conversion of income into value

Answer 1

Capitalization

Question 2

What are the two methods of capitalization?

Answer 2

Direct capitalization

Yield capitalization

Question 3

_________ capitalization is used when there is one income from one time period.

Answer 3

Direct capitalization

Question 4

________ capitalization is used when there are a series of incomes to be derived in the future over more than one time period that need to be discounted to present value.

Answer 4

Yield capitalization

Question 5

To find Gross rent multiplier____

Answer 5

divide the sale price by the total monthly rent for the property

Question 6

GRM

after looking through all 4 comparables pick the most similar and select the GRM of that one.

Answer 6

Note: do not take the average of the four comps’ GRM and use that. Instead use the GRM for the comparable most similar to the subject.

Question 7

Keep in mind that commercial properties are always analyzed and valued on the basis of

Answer 7

annual income, not monthly income as with 1-4 family properties.

Question 8

Aslo, commercial properties are generally analyzed and valued on the basis of_____ operating income

Answer 8

Net operating income

Question 9

Yield capitalization is also called

Answer 9

discounted cash flow analysis

Question 10

The first step in yield capitalization is to_____

Answer 10

analyze the subject’s income stream

Question 11

Discouting is simply

Answer 11

the opposite of compounding.

In discounting, a future dollar is brought back from the future to present value.

Question 12

Yield Cap

Answer 12

Press the gold f and CLX keys to clear any previous entries in your HP 12C calculator.
The holding period is five years, so we enter 5 n into your calculator.
As stated, the rate is 10%, so we enter 10 i
Recall that NOI is $150,000 each year. We enter 150000 CHS. Why did we change the sign (CHS)?
To calculate the present value of the income stream, press PV.
HP12C Keystrokes:
5 n > 10 i > 150,000 CHS PMT > PV equals $568,618.02

Question 13

_______The total potential income attributable to property at full occupancy before vacancy and operating expenses are deducted.

Answer 13

Potential gross income

Question 14

_____The anticipated income from all operations of the real estate after an allowance is made for vacancy and collection losses and an addition is made for any other income.

Answer 14

Effective gross income

Question 15

_________The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income, but begore mortgage debt service and book depreciation are deducted.

Answer 15

Net operating income

Question 16

_________The portion of net operating income that remains after total mortgage debt service is paid but before income tax on operations is deducted; also called before-tax cash flow or equity dividend.

Answer 16

Pre-tax cash flow (PTCF)

Question 17

The portion of pre-tax cash flow that remains after all income tax liabilities have been deducted.

Answer 17

After-tax cash flow (ATCF)

Question 18

A lump-sum benefit that an investor receives or expects to receive upon the termination or sale of an investment.

Answer 18

Reversion

Question 19

An ____ rate expresses the relationship between one year’s income and the corresponding value of a property.

Answer 19

An income rate

Question 20

The relationship between a single year’s net operating income expectancy and the total property price or value.

Answer 20

Overall capitalization rate

Question 21

What does the purpose of an appraisal assignment define?

Answer 21

the type and definition of value used in the assignment

Question 22

A value opinion of a proposed office building based on a current effective date would generally require what kind of assignment condition?

Answer 22

a hypothetical condition

Question 23

The ratio of annual debt service to the principal amount of the mortgage loan is called the

Answer 23

mortgage capitalization rate

Question 24

If the net operating income of a property is $187,500 and the market indicates an overall cap rate of 7.5% what is the indicated value using direct capitalization?

Answer 24

$187,500/0.075 =

$2,500,000

Question 25

What is the indicated overall capitalization rate of a property that sold for $825,000 and has a net operating income of $53,625?

Answer 25

$53,625/$825,000 = 0.065 (6.5%)

Question 26

What is the gross rent multiplier of a property that sold for $174,000 and has a gross monthly rent of $1,500?

Answer 26

$174,000/$1,500 = 116 GRM

Question 27

The amount left after debt service has been deducted from net operating income is called

Answer 27

Pre-tax cash flow

Question 28

What method is used to convert an estimate of a single year’s income expectancy into an indication of value?

Answer 28

direct capitalization

Question 29

Jackson is appraising a large tract of land that is being farmed for agricultural use. The land use surrounding the farm is currently in transition from agricultural to one-unit residential developments. For this assignment, what two procedures should jackson consider in anlyzing the land value of the property?

Answer 29

Sales comparison and subdivision development analysis

Question 30

When using the income capitalization approach, what six principles are relevant?

Answer 30

1. Highest and best use
2. Externalities
3. Supply and demand
4. Substitution
5. Anticipation
6. Balance

Question 31

The income approach is based primarily on the economic principle of

Answer 31

anticipation

Question 32

_____value is objective, impersonal, and reflects what typical investors in the market might do.

Answer 32

Market value

Question 33

_____value is based on a particular investor. Investment value is the value to a particular investor and has personal, subjective parameters. Investment value may or may not coincide with the market value.

Answer 33

Investment value

Question 34

The ratio of income or yield to the original investment

Answer 34

Rate of return

(function of future benefits to the original investment.

Question 35

Rate of return example:
If a property generated $50,000 of annual net operating income, and the original investment was $500,000, a 10% annual rate of return would be calculated as follows:

Answer 35

Annual income from investment $50,000
_________ = 10% ROR
$500,000

Question 36

What characteristics based on market value are identifiable in an income producing property?

Answer 36

has objective, impersonal parameter, and also reflects what typical investors in the market might do

Question 37

What does GRM refer to in the appraiser’s analysis of a residential income property?

Answer 37

gross rent multiplier

Question 38

What principle is the basis of the income capitalization approach?

Answer 38

anticipation

Question 39

Which of the following is true of an equity capitalization rate?

Answer 39

it is an income rate that reflects the relationship between a single year’s pre-tax cash flow expectancy and the equity investment

Question 40

What are the two primary methods of income capitalization that are differentiated by the duration of their income streams?

Answer 40

direct capitalization and yield capitalization

Question 41

what is a discount rate used for?

Answer 41

to convert future payments or receipts into present value

Question 42

Which economic principle is fundamental to the income capitalization approach?

Answer 42

anticipation

Question 43

When vacancy and collection loss is deducted from potential gross income, it is called which of the following?

Answer 43

effective gross income

Question 44

The principle of anticipation affirms that value is based on

Answer 44

future benefits

Question 45

Which of the following best describes the term, “investment value”?

Answer 45

value to a particular investor, based on personal, subjective parameters