Module08 - Outline

Module08 - Outline - Module 8 - The Income Approach...

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Module 8 - The Income Approach Objectives 13.1 Introducing Income Property and Its Appraisal 13.2 Gross Rent Multiplier Analysis 13.3 Estimating Gross Income and Market Rent 13.4 Operating Expenses and Expense Ratios 13.5 Reconstruction of the Operating Statement 14.1 Purpose and Theory of Capitalization 14.2 Selection of the Capitalization Rate 14.3 Direct and Residual Capitalization Techniques 14.4 Estimating, Measuring, and Discounting Cash Flows 13.1 INTRODUCING INCOME PROPERTY AND ITS APPRAISAL This section covers the types of income property, the motives and benefits of its ownership, and the methods of appraising it. Types of Income Property Property types usually treated as income property include the following: 1. Multiple residential 2. Commercial stores, offices, hospitals, hotel and motels, etc. 3. Industrial properties, such as warehouses and factories Motives and Benefits of Ownership Tangible Benefits 1. Return on the investment, usually primarily in the form of income 2. Return of the investment, for example, when the property is sold Intangible Benefits 1. Pride of ownership 2. A sense of security 3. Opportunity to apply management skills The Income-Value Relationship Utility, Income, and Value 1. Utility is a basic characteristic of value. 2. Income is the annual money, or other funds received from an investment. a. Money earns money. b. Stocks pay dividends. c. Real estate produces rent. 3. Value is defined as: a. The present worth of future benefits b. The relationship between the amount of return and rate of return Examples of Monetary Relationships 1. A savings account that earns $100 for one year at 5% interest is worth $2,000 because $100 is 5% of $2,000. a. The income is $100. b. The value is $2,000.
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c. The return rate is 5%. 2. Real estate producing $50,000 annual net income can be said to be worth $500,000 if the required annual return is 10%. a. The income is $50,000. b. The value is $500,000. c. The return rate is 10%. 3. In both examples, value is the relationship between the amount of return and the rate of return. It can be expressed by the formula: Value = Income ÷ Rate of Return or, V = I ÷ R R is often called the Cap Rate when applied to stabilized properties. Methods of Appraising Income Property The Income Capitalization Approach Here are the six basic steps in the income approach (direct capitalization): 1. Estimate the annual gross income. 2. Estimate typical vacancy and collection losses. 3. Subtract to arrive at the effective gross income. 4. Estimate annual expenses, and subtract to calculate net income. 5. Arrive at a capitalization rate and method. 6. Divide the net operating income by the capitalization rate. Example 13.1 Direct Capitalization
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This note was uploaded on 09/17/2011 for the course CGS 3300 taught by Professor Kaleem during the Spring '08 term at FIU.

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Module08 - Outline - Module 8 - The Income Approach...

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