INCOME APPROACH APPLIED

INCOME APPROACH APPLIED

Using the Overall Rate procedures just discussed, here are two examples for finding estimated value using the
Income Approach.

1. What is the market value of a 10 unit apartment house with an estimated market rent per unit of $500 per
month? The market vacancy and collection loss is 7%. The subject property expenses appear consistent
with similar properties in the market and similar comparable sales indicate an Overall Rate of 8 percent.
The Fixed expenses are: real property taxes of $6,420 and insurance of $860. Variable expenses are:
management - $3,960; utilities - $1200; waste removal - $600; reserves for replacement - $1,700 (roof
$800, painting $500, carpeting $400).

Potential Gross Income (Annual) .............................. $60,000

(10 x $500 x 12 = $60,000)

Less Vacancy and Collection Loss................................ 4,200

(.07 x $60,000 = $4,200)

Effective Gross Income ........................................ 55,800

Less Expenses

Fixed

Taxes .............. $6,420

Insurance ............. 860

Total ............................. $7,280

Variable

Management .......... 3,960

Utilities ........... 1,200

Waste Removal ..... 600

Total ............................. 5,760

Reserves for Replacement
Roof .................. 800

Painting .............. 500

Carpeting ............. 400

Total ............................. 1,700

SUBTRACT TOTAL OF EXPENSES ................................... -14,740

NET OPERATING INCOME (NOI) ................................... $41,060

Overall Rate from analysis of comparable sales is 8%.

Using formula I ÷ R = V

$41,060 ÷ .08 = $513,250

Indicated Market Value (rounded) ................................ $515,000

2. A small commercial building has a contract rent of $276,500 annually and suffers vacancy/collection losses
of 5%. Expenses include: real property taxes $22,300; utilities $8,500; roof reserve $15,000; insurance
$11,000; maintenance $20,000; repainting and fixture reserve $5,000; and management $20,000. The
subject’s rental rates, vacancy and collection losses, and operating expenses are within market norms for
similar properties. The appraiser also finds that similar properties have Overall Rates ranging from 8.75%
to 9.37%. Based on this market data the appraiser selects an indicated Overall Rate for the subject property
of 9%. Using the Income Approach, what is the indicated value of the property?

Potential Gross Income (Annual) ................................. $276,500

Less Vacancy and Collection Loss (5%) ............................. 13,825

Effective Gross Income ........................................... 262,675

Less Expenses

Fixed

Taxes .............................. $22,300

Insurance ........................... 11,000

Variable

Maintenance ......................... 20,000

Utilities ............................ 8,500

Management .......................... 20,000

Reserve for Replacements

(Roof, Repainting and Fixtures) ..... 20,000

Subtract Total Expenses ......................... -101,800

Net Operating Income (NOI) ....................................... 160,875

Indicated Overall Capitalization Rate 9%
$160,875 ÷ .09 = $1,787,500

Indicated market value (rounded) ................................

$1,790,000