ADDITIONAL PRACTICE PROBLEMS
ADDITIONAL PRACTICE PROBLEMS somebodyADDITIONAL PRACTICE PROBLEMS
The following are some additional practice problems with suggested solutions.
Applying the Income (Capitalization) Approach
1. 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 rent 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?
Solution.
30 x $600 = $18,000 x 12 = ........................................ $216,000
20 x $475 = $9,500 x 12 = .......................................... 114,000
Apartment rental income............................................ $330,000
Plus other income: $1200 x 12 = ..................................... 14,400
Potential Gross Annual Income ..................................... $344,400
Less 5% vacancy/collection loss .................................... -17,220
Total annual effective gross income ............................... $327,180
2. The owner’s operating statement shows the following annual expenses:
FIXED EXPENSES.
Real Property Taxes ....................................... $31,500
Insurance ................................................... 2,200
License ....................................................... 200
Capital Improvements ....................................... 22,000
Depreciation ............................................... 10,000
$65,900
VARIABLE EXPENSES.
Water ...................................................... $9,000
Gas and Electricity ......................................... 6,000
Pool Service ................................................ 4,800
Gardening Maintenance ....................................... 1,200
Entertainment Expenses ........................................ 750
Building Maintenance ....................................... 10,000
Resident Manager Salary .................................... 12,000
Refuse Service .............................................. 1,200
$44,950
RESERVES FOR REPLACEMENTS.
Appliances, carpets, drapes ................................ $6,000
Building components ..................................... 4,000
$10,000
TOTAL EXPENSES..................................... $120,850
After reconstructing owner’s statement (determining proper allowable expense items), what is property’s annual
estimated net income?
Solution.
Deduct $32,000 (Capital Improvements and Depreciation) from fixed expenses and $750 (Entertainment
Expense) from variable expense, as being improper deductions.
From problem #1, the effective annual gross income is . $327,180
EXPENSES.
FIXED .......................................... $33,900
VARIABLE ........................................ 44,200
REPLACEMENT RESERVES ............................ 10,000
TOTAL EXPENSES ................................... - 88,100
ESTIMATED ANNUAL NET INCOME OF PROPERTY ........ $239,080
3. The appraiser determined a proper overall capitalization rate for the above property is 9.5%. What is the
estimated property value?
Solution.
$239,080 net income ÷ .095 cap rate = $2,516,632 estimated property value rounded to $2,500,000.