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Income Approach

Terms in this set (15)

Market Rent
(rent that a property can be expected to earn during its life)
Reversion
resale amount when the property is sold
Capitalization Rate
The rate of return on an investment
How is a cap rate determined?
extracting and then applying the sales of similar investment properties to the subject property's net income.
What is the simplest and most widely used method of capitalization?
Direct Capitalization
Which direct capitalization method is used only to value properties that are not sold or purchased on the market?
Contractor/cost method
Which direct capitalization method is only used to value bare land, or to value properties that are immediately ready for development or redevelopment?
Development Method (or Residual Method)
Which direct capitalization method is used for most property types, as long as there is sufficient evidence of previous sales?
Comparable Method/Sales Comparison Approach
Which direct capitalization method is used for most rent-producing (leased) commercial (and residential) property, if the property's future cash flow is also projected to come from leasing the property.
Investment Method/Income Method
Which direct capitalization method is used in the practice of trading properties such as restaurants, nursing homes, or hotels - where there is little existing or available rate-specific evidence?
Accounts Method/Profits Method
What type of cap rate is used for complex property, or a property that has unusual factors that require a risk adjustment,
risk adjusted cap rate
Steps of Income Approach
1. Estimate annual potential gross income from rent and other source of income
2. Deduct an appropriate allowance for vacancy and rent loss = effective gross income.
3. Deduct the annual operating expenses = net operating income.
4. Determine cap rate. NOI/purchase price of similar property= cap rate
5. Apply rate to NOI NOI/estimated value of property
Gross Rent Multiplier (GRM)
Sales price / gross monthly rent
Monthly rent x GRM=value
Gross Income Multiplier (GIM)
Sales price / gross annual income
3 techniques for measuring depreciation
1. Breakdown method: divides depreciation into its three separate components: physical deterioration, functional obsolescence, and external (economic) obsolescence.
2. abstraction method: using market data to discover some indication about a property's depreciation amount.
3. age life method: based primarily on observation.
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