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NYS Appraisal chptr 10 Income Approach


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Income Approach
property valued by the amount of income it produces. Normally used on investment properties such as offices, shopping centers. Can be used for any active rental market
Income approach views real estate as
an investment
ratio between the rate of income and the amount of investment (ROR=amt of income / Amt of investment)
the repayment of an investment
Refers to the income earned by an equity investment
Refers to the income earned by a loan
the principle of anticipation
Capitalization or CAP RATE
The additional return due to risk
Income Capitalization
estimated value on the basis of income produced
Direct Capitalization
the income from a single period converted to value (month, year). Also called market capitalization.
Yeild Capitalization
Analyzes all of the anticipated cash flows over the life of an investment
Appraisers may estimate a properties value based on
1) PGI - Potential Gross Income the total amount of rent a property is capable of producing w/o deducting expenses
Scheduled rent or contract rent
Amount of rent called for under n existing lease
Market Rent
the amount a tenent would pay under current conditions
-scheduled rent or contract rent
3) NOI Net Operating Income - most often used in direct capitalization It represents the amount of income that is available as a return to the investor
Operating Expenses
Expenses necessary to maintain the flow of income from the property.
Fixed Expenses
Expenses that do vary depending on occupancy
Reserves for Replacements
$ set aside for replacing short lived components of the property
Short Lived Component
carpet, paint,roof
Pre Tax Cash Flow aka equity dividend before tax
amount of income left over after the mortgage lender has been paid
Oerating Statement
I financial statement that lists income & expenses for a property
is a figure that represents the relationship between income and value
Four ways to calculate the CAP RATES - 1
1. Sales Comparison (most preferable) analysis by sale prices and closed sales. Ex: property sells for $120,000, est income is 12,000
12K/120K = cap rate of 10%
Four ways to calculate the CAP RATES
2. Operating Expense Ratio - Average Ratio of operating expense to effective gross income.
Equation: operating income / effective gross income
Four ways to calculate the CAP RATES - 3 Band of Investment Method
The App calculates seperate CAP Rates for the investor & Lender, the weighted Avg is then used as the overall Cap Rate
Four ways to calculate the CAP RATES - 4 Debt Coverage Method
Lendors will not lend $ unless they know the income will cover the mortgage. Cap Rate is calculated by Debt Portion of opperating income by loan amount
Calculation Value By Direct Capitalization
The income amount is divided by the CAP RATE
Example; Income 15K/.105 =$142,900
Gross Income Multipliers (GIM)
Income ($9000 per year) x 110 (multiplier) = ($99,000) Value

This is most often used to convert Gross Income to Value
Residual Techniques
Use Direct Cap to determine the value of one component
Building Residual Technique
Est the value of the land, then uses the residual technique to establich value of the building
Land Residual Techique
Building is estimated to get the land value
the process of converting the amount of a future payment into present value

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