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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 === \$ 60,0004,200\$ 55,800 Less Expenses Fixed Expenses:TaxesInsuranceTotalOperating Expenses:ManagementUtilitiesWaste RemovalTotalReserves for Replacement:RoofPaintingCarpetingTotal =========== \$ 3,200860\$ 4,0603,9601,200600\$ 5,760800500400\$ 1,700 Subtract Total ExpensesNet 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 === \$ 27,6501,383\$ 26,267 Less Expenses Fixed Expenses:TaxesInsuranceOperating Expenses:MaintenanceUtilitiesManagementReserves for Replacement:(Roof, Repainting and Fixtures) ====== \$ 3,7801,1002,0008502,0002,000 Subtract Total ExpensesNet 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