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  • INCOME APPROACH APPLIED

Using procedures just discussed, here are two examples for finding estimated value using the income approach.

  • 1. How much should an investor pay for a 10 unit apartment house, 24 years old, estimated fair market rent per unit being $500 per month. Indicated vacancy factor is 7%. Acceptable cap rate is 8 percent. Fixed expenses are: taxes of $3,200 and insurance of $860. Operating expenses are: management - $3,960; utilities - $1200; waste removal - $600; reserves for replacement - $1,700.
Analysis Figures
Gross Scheduled Income (Annual)
(10 x $500 x 12 = $60,000)
Less Income Loss Due to Vacancy Factor
(.07 x $60,000 = $4,200)

Effective Gross Income

=

=

=

$ 60,000

4,200


$ 55,800
Less Expenses
Fixed Expenses:
Taxes
Insurance
Total

Operating Expenses:
Management
Utilities
Waste Removal
Total

Reserves for Replacement:
Roof
Painting
Carpeting
Total

=
=
=


=
=
=
=


=
=
=
=

$ 3,200
860
$ 4,060


3,960
1,200
600
$ 5,760


800
500
400
$ 1,700
Subtract Total Expenses

Net Operating Income (NOI)
=

=
- 11,520

$ 44,280
Capitalization Rate Furnished By Owner is 8%.
Using formula I divided by R = V
$44,280 / .08 = $553,500
Indicated Total Value by Income Approach (rounded) = $ 555,000
  • 2. A small commercial building has rental income of $27,650 annually and suffers vacancy/collection losses of 5%. Expenses include: taxes $3,780; utilities $850; roof reserve $1,500; insurance $1,100; maintenance $2,000; repainting and fixture reserve $500; and management $2,000. The appraiser finds similar properties have cap rates ranging from 8.75% to 9.37%. Based on this market data the appraiser selects an indicated overall capitalization rate for the subject property of 9%. Using the Income Approach, what is the indicated value of the property?
Analysis Figures
Gross scheduled Income (Annual)
Less Vacancy and Collection Loss (5%)

Effective Gross Income
=
=

=
$ 27,650
1,383

$ 26,267
Less Expenses
Fixed Expenses:
Taxes
Insurance

Operating Expenses:
Maintenance
Utilities
Management

Reserves for Replacement:
(Roof, Repainting and Fixtures)

=
=


=
=
=


=

$ 3,780
1,100


2,000
850
2,000


2,000
Subtract Total Expenses

Net Operating Income (NOI)
=

=
- 11,730

$ 14,537
Indicated Overall Capitalization Rate 9%
$14,537 / .09 = $161,522
Indicated Total Value by Income Approach (rounded) = $ 161,500
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