Part 3 Intro to income capitalization Flashcards
The conversion of income into value
Capitalization
What are the two methods of capitalization?
Direct capitalization
Yield capitalization
_________ capitalization is used when there is one income from one time period.
Direct capitalization
________ 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.
Yield capitalization
To find Gross rent multiplier____
divide the sale price by the total monthly rent for the property
GRM
after looking through all 4 comparables pick the most similar and select the GRM of that one.
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.
Keep in mind that commercial properties are always analyzed and valued on the basis of
annual income, not monthly income as with 1-4 family properties.
Aslo, commercial properties are generally analyzed and valued on the basis of_____ operating income
Net operating income
Yield capitalization is also called
discounted cash flow analysis
The first step in yield capitalization is to_____
analyze the subject’s income stream
Discouting is simply
the opposite of compounding.
In discounting, a future dollar is brought back from the future to present value.
Yield Cap
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
_______The total potential income attributable to property at full occupancy before vacancy and operating expenses are deducted.
Potential gross income
_____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.
Effective gross income
_________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.
Net operating income
_________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.
Pre-tax cash flow (PTCF)
The portion of pre-tax cash flow that remains after all income tax liabilities have been deducted.
After-tax cash flow (ATCF)
A lump-sum benefit that an investor receives or expects to receive upon the termination or sale of an investment.
Reversion
An ____ rate expresses the relationship between one year’s income and the corresponding value of a property.
An income rate
The relationship between a single year’s net operating income expectancy and the total property price or value.
Overall capitalization rate
What does the purpose of an appraisal assignment define?
the type and definition of value used in the assignment
A value opinion of a proposed office building based on a current effective date would generally require what kind of assignment condition?
a hypothetical condition
The ratio of annual debt service to the principal amount of the mortgage loan is called the
mortgage capitalization rate
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?
$187,500/0.075 =
$2,500,000
What is the indicated overall capitalization rate of a property that sold for $825,000 and has a net operating income of $53,625?
$53,625/$825,000 = 0.065 (6.5%)
What is the gross rent multiplier of a property that sold for $174,000 and has a gross monthly rent of $1,500?
$174,000/$1,500 = 116 GRM
The amount left after debt service has been deducted from net operating income is called
Pre-tax cash flow
What method is used to convert an estimate of a single year’s income expectancy into an indication of value?
direct capitalization
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?
Sales comparison and subdivision development analysis
When using the income capitalization approach, what six principles are relevant?
- Highest and best use
- Externalities
- Supply and demand
- Substitution
- Anticipation
- Balance
The income approach is based primarily on the economic principle of
anticipation
_____value is objective, impersonal, and reflects what typical investors in the market might do.
Market value
_____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.
Investment value
The ratio of income or yield to the original investment
Rate of return
(function of future benefits to the original investment.
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:
Annual income from investment $50,000
_________ = 10% ROR
$500,000
What characteristics based on market value are identifiable in an income producing property?
has objective, impersonal parameter, and also reflects what typical investors in the market might do
What does GRM refer to in the appraiser’s analysis of a residential income property?
gross rent multiplier
What principle is the basis of the income capitalization approach?
anticipation
Which of the following is true of an equity capitalization rate?
it is an income rate that reflects the relationship between a single year’s pre-tax cash flow expectancy and the equity investment
What are the two primary methods of income capitalization that are differentiated by the duration of their income streams?
direct capitalization and yield capitalization
what is a discount rate used for?
to convert future payments or receipts into present value
Which economic principle is fundamental to the income capitalization approach?
anticipation
When vacancy and collection loss is deducted from potential gross income, it is called which of the following?
effective gross income
The principle of anticipation affirms that value is based on
future benefits
Which of the following best describes the term, “investment value”?
value to a particular investor, based on personal, subjective parameters
