Chapter 12: The Income Approach

The Income Approach - 6 steps. 

Direct Cap. - converting the income generated by a property into capital value (cap. rate). Based on a single year projected income and expenses. 

Net operating income / overall capitalization rate = Value 

Yield Cap. - conversion of projected income stream into an estimate of value by analyzing forecasted operations over a holding period. 

The Reconstructed Operating Statement - 1 year analysis of income and expenses with adjustment. Adjustments made on comparable properties. 

Excluded Items - business tax, depreciation, interest on mortgage and capital improvements.

Step 1 - Estimate Potential Gross (rental) Income - multiplying the rental value per unit by the # of units.

Step 2 - Calculate Effective Gross Income - potential gross (rental) income estimated in step 1 plus other income, less an allowance for vacancy and credit losses.

Step 3 - Calculate Gross Operating Expenses - only expenses necessary to maintain the flow of rental income are included.

Step 4 - Calculate Net Operating Income (NOI) - income after deducting all expenses from gross income.

Step 5 - Select Capitalization Rate - rate of return on investment (discount rate) / rate of return of investment (recapture rate)