By somebody |
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