Chapter 9 - Chapter 9 Valuation Using the Income Approach...

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Chapter 9 Valuation Using the Income Approach 2/14/08 The value of an income producing property is based on the future expected income; it is the present value of expected income. Income Capitalization - the process of converting expected income into a value estimate, converting future income into present value. A capitalization Rate (cap rate) measures the return on investment for the first year of operation, Cap Rates are viewed as a percentage; e.g. a 10% Cap Rate. Net Operating Income - revenues minus operating expenses for the subject property. Capitalization simply values a property based on the current income as compared to a market rate of return for that type of property. The formula used in this calculation is o Value = NOI / Cap Rate Ex: NOI = $100,000 Cap Rate = .08 or 8% Value - $100,000 / .08 = $1,250,000 Discounted Cash Flow- is a more detailed and sophisticated analysis that involves a multi-year forecast of a number of years of property ownership (and cash flows) as well as a projection of sale of the property at the end of the holding period. The expected future cash flows and sales proceeds are “discounted” to their present values to determine the indicated value of the property. Estimating Net Operating Income (NOI) In estimating the expected NOI of an existing property, appraisers and analysts rely on o 1) the experience of similar properties in the market and o 2) the historic experience of the subject property. o These items are then placed in a reconstructed operating statement format which shows the appraiser’s estimate of stabilized income and expenses.
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