Part 4 Flashcards
Income Capitalization Formulas
- I = Income
- R = Rate
- F = Factor
- V = Value
These are the primary ________ of ________
components of capitalization
Which of the following would you need to solve for value (V)?
This was a quiz question.
EGI and multiplier (F)
Using the V = I x F formula, you would need EGI and multiplier (F)
A __________ is used instead of a capitalization rate when an appraiser is employing the VIF formula to capitalize income. __________ are not divided into income, but instead are used to multiply the income to derive a value—hence the reason they are called multipliers.
Factor, Factors
A _________ is an element of a mathematical set that when multiplied by a given element yields the identity element (Merriam- Webster).
Reciprocal.
Example. If a capitalization rate (R) is 6.25%, what is its corresponding factor? The answer can be found by taking the reciprocal of 6.25%.
1 / 0.0625 = 16, so 16 is the factor that corresponds to a capitalization rate of 6.25%, and the reciprocal of 16 is 6.25% (that is, 1 / 16 = 0.0625).
Concerning factors and multipliers, which of the following is correct?
A factor is the same as a multiplier.
In the VIF formula, factors are used to multiply the income to derive a value. Hence, they can also be known as multipliers. Multipliers are usually identified with the type of income applied in the formula (e.g. PGI, EGI, or NOI).
This is the ratio between the sale price (or value) of a property and its effective gross income (EGI) or its potential gross income (PGI).
________ is used in residential properties with five or more units and in some commercial properties (for example, hotels) as a method of direct capitalization (see the VIF formula).
Gross income multiplier (GIM)
I = R x V
R = I / V
V = I /R
These are the formulas for what?
IRV, used to solve for an unknown when two of the components are identified or can be derived from existing data.
V = I×F
I = V / F
F = V / I
These are the formulas for what?
VIF, used to solve for an unknown when two of the components are identified or can be derived from existing data.
The ratio of total operating expenses to effective gross income (TOE / EGI); the complement of the net income ratio, i.e., OER = 1 – NIR.
Operating expense ratio (OER)
This is a similar ratio to GIM, but it applies to rental income only. This multiplier is applied in less complex properties such as rented one-unit residential homes and two-to-four unit small residential income properties.
Gross rent multiplier (GRM)
Multipliers are identified with the type of income that they are being multiplied by (used in the formula)
Effective gross income (EGI) x _________
Effective gross income multiplier (EGIM)
Multipliers are identified with the type of income that they are being multiplied by (used in the formula)
Potential gross income (PGI) x _________
Potential gross income multiplier (PGIM)
If the overall rate is 8%, what is its corresponding factor?
This was a quiz question.
12.5
A factor is the reciprocal of a rate. One divided by any number is it’s reciprocal. 1 / 0.08 = 12.5. Dividing by 0.08 is the same as multiplying by 12.5
Which of the following do you need to know in order to solve for an operating expense ratio?
This was a quiz question.
operating expenses and EGI
A three-unit residential property sells for $232,000. Two units rent for $725 per month, and one unit rents for $550 per month. If the overall rate is 9.5%, what is the equivalent factor?
This was a quiz question.
10.53
A lot of the information given here was not necessary to answer the specific question. A factor is the reciprocal of a rate. A reciprocal is one divided by the number. The question is asking for the factor that is equivalent to the overall rate of 9.5%, so 1 / 0.095 = 0.1052631, or 10.53 is the factor to 9.5%.
A gross rent multiplier (GRM) is generally used to value what type of property?
This was a quiz question.
one to four-unit residential
A property sold for $555,000. The buyer anticipated that the potential gross income would be $93,000, the vacancy would be 5%, and expenses would be 35% of EGI in the year after the purchase. What is the overall capitalization rate (RO)?
This was a quiz question.
10.35%
$93,000 PGI x 5% vacancy rate = $4,650 | $93,000 - $4,650 = $88,350 EGI |$88,350 EGI - $30,922 operating expenses (35%) = $57,428 NOI | $57,428 / $555,000 = 10.35%
A 200 unit apartment just sold for $9,000,000. Rents averaged $900 per month, and the market vacancy was 10%. The property had an operating expense ratio of 35%, and typical overall capitalization rates are 10%. What effective gross income multiplier (EGIM) is indicated by this sale?
This was a quiz question.
4.63
200 units x $900 x 12 = $2,160,000 PGI x (1-.1) = $1,944,000 EGI / $9,000,000.
Use the F = V / I formula $9,000,000 / $1,944,000 = 4.63 EGIM
What difference may be identified in the factors when a gross income multiplier (GIM) is used in analyzing commercial income properties, and a gross rent multiplier (GRM) is used in analyzing a residential income-producing property?
This was a quiz question.
GIM is based on annual income, whereas the GRM is based on monthly rent in the case of a residential property.
What situation would give an appraiser the least amount of concern when comparing sales to derive an indicated gross rent?
comparing rentals sales located in the same high-rise condominium building
or
comparing rentals in a rent-controlled area to an area that is not rent-controlled
This was a quiz question.
comparing rentals sales located in the same high-rise condominium building
Of the choices available, rental sales in the same building would be a positive aspect to the appraiser, rather than negative.
Which of the following would you need to solve for income (I)?
This was a quiz question.
factor and value
Using the V = I x F formula, you would need Value and a factor, I = V/F
Which of the following would you need to solve for value (V)?
This was a quiz question.
net income and overall rate
A comparable four-unit residence just sold for $300,000. It was rented at the time of sale for (or had a market rent of) $1,000 per unit per month. What is the GRM?
This was a quiz question.
75
Solve for gross monthly income NOI ($1,000 x 4 ) = $4,000 PGI.
$300,000 / $4,000 = 75.
What is the capitalization rate (R) for a property that has a net operating income of $40,000 and a net income multiplier (NIM) of 12.5?
Note: A NIM is based on the same concepts as a gross income multiplier (GIM).
This was a quiz question.
8%
$40,000 NOI x 12.5 NIM = $500K Value | $40K (I) / $500K (V) = 8%
Which of the following rates would be used when seeking the value of the property (both land and improvements) based on a single year of net operating income?
the overall capitalization rate
An overall capitalization rate is used to convert net operating income into value and includes the income from both the land and the improvements, which results in the value of the property (both land and improvements).
What is the value of a property that has an appropriate capitalization rate (R) of 12.5%, an operating expense ratio of 40%, and net operating income of $10,000?
$80,000
Use the I / R = V formula $10,000 / 0.125 = $80,000.
