Practice of Mortgage Brokerage - AMBA
Income Capitalization Approach
Used to determine the value of a revenue-generating property; the value of a property is directly related
to the income it will generate.
Highest and Best Use
Use that supports the highest value and produces the greatest net return over a period of time. Has
significant impact on the value of the property.
ROI
Return on Investment. If I invest x dollars, how much will I get back in return? Income generating
properties must have a favorable ROI in order to interest buyers.
Gross Revenue
Revenue BEFORE expenses
Net operating income (NOI)
Gross Revenue MINUS expenses and overhead costs is NOI
Income Approach Valuation - 2 steps
1) Determine NOI
2) Determine overall property value by capitalizing NOI
,Determine NOI - 3 steps
1) find potential gross annual income (rent, parking income, laundry machine income)
2) deduct allowance for vacancies and bad debts
3) This gives you the Effective Gross Income
4) Take away operating expenses (heat, gas, property tax, etc.)
5) Answer is your NOI (AKA: NOL - Net operating Loss)
Potential Gross Annual Income
Revenue estimate based on current market rents in similar properties. Refers to 100% occupancy
situation in a rental property. Include things like parking rentals and laundry facilities.
Operating expenses in a rental property
property taxes, gas and electricity, heat, water, maintenance and repair, reserve fund contributions if
applicable, property management fees, property insurance, misc expenses such as cleaning, supplies,
etc.
Vacancies and bad debts
allowances that are a percentage of the potential gross income (vacant suites, other disruptions in
income). Based on long-term vacancy trends in the area.
Find Effective Gross Income
Gross Potential income MINUS vacancy allowance
,Find NOI
Effective Gross Income (which is your potential gross income - vacancy allowance)
MINUS
operating expenses
= NOI
Stabilizing the NOI
A vacant building with no income stream is reviewed by an appraiser by ASSUMING normal occupancy
rates and lease rates. Appraisers never use ZERO NOI.
Determine property value by capitalizing NOI
Net Annual Income (I)
DIVIDED BY
Capitalization Rate (R)
= PROPERTY VALUE (V)
How to find capitalization rate
Determined using sales data from the same market.
Net Annual Income (Or income or NOI)
DIVIDED BY
Sales price (or value)
= capitalization rate
Solving for Value in commercial property
Value =
, Income (NOI) or (I)
DIVIDED BY
capitalization rate (R)
Solving for NOI or income in commercial property
Value (property value) x rate (capitalization rate)
Solve for LTV
Loan
DIVIDED BY
Value
Capitalization rates and investor yield (rate of return)
Measure how long it will take the investment to pay itself off.
for $1million property with NOI of $100,000/year
= 10% capitalization rate (because R = I divided by V)
= 10% per year x 10 years = 100% paid off.
Property has paid for itself fully in 10 years.
**To an investor, the capitalization rate is his rate of return on investment.
The lower the capitalization rate....
The lower the rate on return of investment or
the less of amount of money the investor is making in relation to the amount they invested.
Income Capitalization Approach
Used to determine the value of a revenue-generating property; the value of a property is directly related
to the income it will generate.
Highest and Best Use
Use that supports the highest value and produces the greatest net return over a period of time. Has
significant impact on the value of the property.
ROI
Return on Investment. If I invest x dollars, how much will I get back in return? Income generating
properties must have a favorable ROI in order to interest buyers.
Gross Revenue
Revenue BEFORE expenses
Net operating income (NOI)
Gross Revenue MINUS expenses and overhead costs is NOI
Income Approach Valuation - 2 steps
1) Determine NOI
2) Determine overall property value by capitalizing NOI
,Determine NOI - 3 steps
1) find potential gross annual income (rent, parking income, laundry machine income)
2) deduct allowance for vacancies and bad debts
3) This gives you the Effective Gross Income
4) Take away operating expenses (heat, gas, property tax, etc.)
5) Answer is your NOI (AKA: NOL - Net operating Loss)
Potential Gross Annual Income
Revenue estimate based on current market rents in similar properties. Refers to 100% occupancy
situation in a rental property. Include things like parking rentals and laundry facilities.
Operating expenses in a rental property
property taxes, gas and electricity, heat, water, maintenance and repair, reserve fund contributions if
applicable, property management fees, property insurance, misc expenses such as cleaning, supplies,
etc.
Vacancies and bad debts
allowances that are a percentage of the potential gross income (vacant suites, other disruptions in
income). Based on long-term vacancy trends in the area.
Find Effective Gross Income
Gross Potential income MINUS vacancy allowance
,Find NOI
Effective Gross Income (which is your potential gross income - vacancy allowance)
MINUS
operating expenses
= NOI
Stabilizing the NOI
A vacant building with no income stream is reviewed by an appraiser by ASSUMING normal occupancy
rates and lease rates. Appraisers never use ZERO NOI.
Determine property value by capitalizing NOI
Net Annual Income (I)
DIVIDED BY
Capitalization Rate (R)
= PROPERTY VALUE (V)
How to find capitalization rate
Determined using sales data from the same market.
Net Annual Income (Or income or NOI)
DIVIDED BY
Sales price (or value)
= capitalization rate
Solving for Value in commercial property
Value =
, Income (NOI) or (I)
DIVIDED BY
capitalization rate (R)
Solving for NOI or income in commercial property
Value (property value) x rate (capitalization rate)
Solve for LTV
Loan
DIVIDED BY
Value
Capitalization rates and investor yield (rate of return)
Measure how long it will take the investment to pay itself off.
for $1million property with NOI of $100,000/year
= 10% capitalization rate (because R = I divided by V)
= 10% per year x 10 years = 100% paid off.
Property has paid for itself fully in 10 years.
**To an investor, the capitalization rate is his rate of return on investment.
The lower the capitalization rate....
The lower the rate on return of investment or
the less of amount of money the investor is making in relation to the amount they invested.
