real estate finance - full book (500 pgs)

What is the investors capitalization rate return 39600

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: le to the subject and to one another, their gross income multipliers should fall within a fairly narrow range. The appraiser then selects the appropriate gross income multiplier indicated by the pattern for the comparable properties. This is the GIM that will be applied to the estimated market rent of the subject property to derive an estimate of value. GIM = Value / GI or Value = GI X GIM Example: This process would be carried out for each rental sales comparable (six comparables in this case). From the above process, a range of multipliers would result. Example: 13, 13, 14, 14.5, 14.5, 14.5, 15.0 From the above example, we can see that 14.5 is the most likely multiplier. If the monthly rent is $2000, then the value would be: $2,000 x 12 x 14.5 = $348,000. Example If the sales price is $100,000 and the monthly rent is $400, the Gross Income Multiplier is $100,000 / (400 x 12) = 20.83 DISADVANTAGES OF USING GROSS INCOME MULTIPLIER GIM is relatively simple to use and easy to understand. It is widely accepted. However, there are limits to its application. Gross rent multiplier analysis depends on an active rental market for residential properties. It may not work if there is insufficient reliable data. A lack of rental market activity may make it impossible to apply GIM analysis. Dynasty School (www.dynastySchool.com) 12-9 REAL ESTATE FINANCE Unusual market forces may distort the relationship between rents and sales prices. Rentals tend to be more sensitive to changes in the environment than owner–occupied properties; while a renter may leave on short notice, an owner usually cannot without financial loss. Sales prices are more sensitive to changes in zoning regulations, tax burden, and physical deterioration than rents are, especially where rent controls distort the relationship between rents and sales prices. It is not quite accurate as using an net operating income (discussed below). The gross income does not account for adjustment on the income losses due to factors like vacancies loss, operating expenses. INCOME CAPITALIZATION While the direct sales comparison and cost...
View Full Document

This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.

Ask a homework question - tutors are online