13 Income Capitalization Approach

1. 13 Income Capitalization Approach Based on the premise that there is a relationship between the income a property can earn and the property’s value— principle of anticipation

2. Potential Gross Income • Rent Market (Economic) Rent Scheduled (Contract) Rent Historical Rent • Other Income Laundry Facilities Parking Spaces Vending Machines

3. Effective Gross Income Derived by totaling potential income from all sources, then subtracting vacancy and collection losses, which are affected by: • Present and past rental losses of subject • Competitive conditions in the area • Estimate of population/economic trends • Quality of tenants • Length of leases

4. Net Operating Income (NOI) Calculated by subtracting the operating expenses of owning a property from its effective gross income Operating expensesinclude: Variable expenses (management, wages, utilities, repairs) Fixed expenses (real estate taxes, insurance) Reserves for replacement (heating, air conditioning, roof, carpeting)

5. Expenses for Appraisal Purposes— Not Accounting Purposes • Available or probable financing not considered, except under the mortgage equity capitalization method • Income tax payments are not considered • Depreciation charges on building or other improvements not considered • Payments for capital improvements are not treated as operating expenses but are taken from replacement reserve monies

6. Operating Statement Makes use of either • Cash basis accounting in which revenue is recorded when received and expenses are recorded when paid, or • Accrual basis accounting in which revenue includes all revenue earned, whether or not received during the period; expenses recorded when incurred, whether or not they have actually been paid during the period

7. Operating Statement Ratios Three ratios: Operating Expenses Effective Gross Income = Operating Expense Ratio Net Operating Income Effective Gross Income = Net Income Ratio Operating Expenses + Debt Service Potential Gross Income = Break-even Ratio

8. Gross Income Multiplier Formula: __Sales Price__ Gross Income = GIM Potential gross income multiplier method considers income from all sources before any deduction for vacancy and collection losses or operating expenses Effective gross income multiplier method deducts vacancy and collection losses from gross income before the multiplier is derived

9. Gross Income Multiplier Analysis Part 1

10. Gross Income Multiplier Analysis Part 2

11. Gross Income Multiplier Analysis Part 3

12. Gross Rent Multiplier Sales Price__ Gross Rent = GRM Used primarily for single-family residences that are not usually purchased as income-producing properties

13. Gross Rent Multiplier Analysis Part 1

14. Gross Rent Multiplier Analysis Part 2

15. Gross Rent Multiplier Analysis Part 3

16. Income Approach Using URAR Form • Enter the subject property’s estimated monthly market rent • Enter the GRM applicable to the subject property • Multiply the monthly market rent estimate by the GRM • Enter the value estimate indicated by the income approach