Income approach

Question 1

What are the steps in the income approach?

Answer 1

1. Estimate annual potential gross income (PGI)
2. Deduct vacancy and collection loss & add other non-rental income to derive effective gross income (EGI)
3. Deduct operating expenses (fixed, variable, and reserves for replacement) to derive net operating income (NOI)

Steps outline the process of determining property value through income generation.

Question 2

What are examples of operating expenses?

Answer 2

• Taxes
• Insurance
• Management
• Repairs & maintenance
• Reserve for replacements

Operating expenses are costs associated with managing and maintaining a property.

Question 3

How do you calculate the cap rate?

Answer 3

1. NOI % value = cap rate
2. Use the NOI of properties similar to the subject property
3. Divide each NOI by the property’s sales price

Cap rate is a key metric in real estate investment analysis.

Question 4

Once you have the cap rate, what do you do?

Answer 4

Apply the cap rate to the subject property’s projected annual net income to estimate value

This step helps in determining the market value of the property based on its income potential.

Question 5

Once you have the value, what do you do?

Answer 5

Reconcile the value indications into a final value estimate - weighted average

Final valuation involves integrating various value estimates to arrive at a comprehensive figure.

Question 6

What is the formula for value using I, R, and V?

Answer 6

I = NOI; R = capitalization rate; V = value (or sales price)
V = I / R

This formula is fundamental in real estate valuation, linking income, cap rate, and value.