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The following are some additional practice problems with suggested solutions.

Applying the Income (Capitalization) Approach

• A 50 unit apartment building and lot are being appraised. The 30 two-bedroom units rent for \$600 and the 20 one-bedroom units rent for \$475 monthly, which is comparable to market rent in the area. Vacancy and collection losses are estimated to be 5% of potential gross income. The parking structure and laundry facility contribute an additional estimated \$1,200 income per month. What is the property's (land and building) total estimated annual effective gross income?
 Analysis Figures 30 x \$600 = \$18,000 x 1220 x \$475 = \$9,500 x 12Apartment rental incomePlus other income: \$1200 x 12Potential Gross Annual IncomeLess 5% vacancy/collection loss ====== \$ 216,000114,000330,00014,400\$344,400- 17,220 Total Annual Effective Gross Income = \$ 327,180
• The owner's operating statement shows the following annual expenses:
 Analysis Figures Fixed Expenses:Real Property TaxesInsuranceLicenseCapital ImprovementsDepreciationTotal Fixed Expenses ====== \$ 7,2002,20020022,00010,00041,600 Operating Expenses:WaterGas and ElectricityPool ServiceGardening MaintenanceEntertainment ExpensesBuilding MaintenanceResident Manager SalaryRefuse ServiceTotal Fixed Expenses ========= \$ 9,0006,0004,8001,20075010,00012,0001,20044,950 Reserves for Replacements:Appliances, carpets, drapesBuilding componentsTotal Reserves for Replacements === \$ 6,0004,00010,000 Total Annual Expenses = \$ 96,550
• After reconstructing the owner's statement (determining proper allowable expense items), what is property's annual estimated net income?
• Deduct \$32,000 (Capital Improvements and Depreciation) from fixed expenses and \$750 (Entertainment Expense) from operating expense, as being improper deductions.
 Analysis Figures From problem #1, the effective annual gross income is = \$ 327,180 Fixed ExpensesOperating ExpensesReplacement ReservesTotal Expenses ==== \$ 9,60044,20010,000- 63,800 Estimated Annual Net Property Income = \$ 263,380
• The appraiser determined a proper capitalization rate for the above property is 9.5%. What is the estimated property value?
 Analysis Figures \$263,380 net income divided by .095 cap rate = \$ 2,772,421 Estimated Property Value = \$ 2,772,421
• Suppose the net income of the property is only \$189,000 and similar properties are valued at \$1,929,000. What is the indicated overall cap rate?
 Analysis Figures \$189,000 (Income) / \$1,925,000 (Value) = 9.8% Overall Cap Rate = 9.8%
• Given, based on comparative sales technique:
 Analysis Figures Sale price of an income propertyBuilding value == \$ 230,000170,000 Remaining estimated life of building = 40 years Annual net income of property = \$ 23,500
• What is the indicated interest rate for the property?
• (Improved properties have both an interest rate and a recapture rate included in the capitalization rate. The recapture rate applies only to the improvements, while the interest rate applies to both land and improvements.)
 Analysis Figures Estimated net income before recapture = \$ 23,500 Recapture for building:100% / 40 yrs. = 2.5% x \$170,000Net income after building recapture == 4,25019,250 Interest Rate = \$19,250 / \$230,000 = 8.3%
• Building Residual Technique Problem (Land value known; building value unknown.)
 Analysis Figures Assume the following:Annual net income from the whole propertyLand valueRecapture rate for building (25 yrs. remaining economic life)Interest rate ==== \$ 14,00042,0004%8%
• What is (1) the building value and (2) the property value?
 Analysis Figures Net income of propertyIncome attributable to land: \$42,000 x .08Income attributable to building === \$ 14,0003,36010,640 Capitalization rate: 12% (8% + 4%)Formula: Present Value = Net income / Capitalization RateTherefore, Indicated value of building = \$10,640 / .12Plus land value == 88,66742,000 Property Value by Building Residual Technique (rounded) = \$ 130,700
• Land Residual Technique Problem (Building value known; land value unknown.) Assume the same figures as above in building residual technique problem, except building value is \$88,700 and land value is unknown.
• What is (1) land value and (2) property value?
 Analysis Figures Net incomeLess income attributable to improvements (\$88,700 x .12)Income attributable to land === \$ 14,000- 10,6443,356 Indicated value of land = \$3,356 / .08 = \$41,950 (rounded)Add improvement value == 42,00088,700 Property Value by Land Residual Technique (rounded) = \$ 130,700
• Assume that comparisons show comparable single-family houses in a neighborhood rent for about \$380 per month and sell for an average of \$45,600. What is the indicated gross rent multiplier for a subject property in this neighborhood?
 Analysis Figures Formula:sales price divided by gross monthly rent = gross rent multiplier \$45,600 / \$380 = 120 Gross Rent Multiplier = 120
• Suppose that, when compared to other rentals, the above property lost \$24 per month rental income due to poor kitchen location. What is the estimated depreciation attributable to incurable functional obsolescence?
 Analysis Figures 120 x \$24 = \$ 2,880 Depreciation Attributable to Incurable Functional Obsolescence = \$ 2,880