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Questions and Answers
The two generic formulas used in direct capitalization are:
The two generic formulas used in direct capitalization are:
- GIM (Gross Income Multiplier) and NOI (Net Operating Income ÷ Value)
- IRV (Income ÷ Rate = Value) and VIF (Value = Income × Factor) (correct)
- Discount Yield Formula and Present Worth of $1 Formula
- Yield Rate × Net Benefits = Value and Net Benefits ÷ Risk Factor = Value
Write the formula for developing a gross income multiplier.
Write the formula for developing a gross income multiplier.
- GIM=NetOperatingIncome×Factor
- GIM=SalesPrice÷GrossIncome (correct)
- GIM=GrossIncome÷SalesPrice
- GIM=Income×MultiplierRate
List three critical comparability criteria necessary when utilizing direct capitalization:
List three critical comparability criteria necessary when utilizing direct capitalization:
- Capital Expenditure Ratio, Assessment Level, Land Valuation Factor
- Land-to-Improvement Ratios, Expense Ratios, Remaining Economic Life (REL) (correct)
- Market Rent Adjustment, Property Condition, Lease Terms
- Operating Expense Ratio, Building Age, Gross Income Multiplier
A property recently sold for $2,000,000.
At the time of sale, it had a potential gross income of $270,000
and an expected vacancy loss of $20,000.
What is the effective gross income multiplier?
A property recently sold for $2,000,000.
At the time of sale, it had a potential gross income of $270,000
and an expected vacancy loss of $20,000.
What is the effective gross income multiplier?
List four types of amenities that must be considered when selecting vacant land sales:
List four types of amenities that must be considered when selecting vacant land sales:
List the four major categories of required comparability that must be considered when selecting improved property sales to use in the development of an overall capitalization rate:
List the four major categories of required comparability that must be considered when selecting improved property sales to use in the development of an overall capitalization rate:
_________________ is a method of converting an estimate of a single year's income into value in one direct step.
_________________ is a method of converting an estimate of a single year's income into value in one direct step.
_________________ is a method of converting future net benefits into present value where each future net benefit is discounted at a proper yield rate (discount rate).
_________________ is a method of converting future net benefits into present value where each future net benefit is discounted at a proper yield rate (discount rate).
The __________________________ shows the periodic payment necessary to amortize a loan at a specified interest rate over a specific number of periods.
The __________________________ shows the periodic payment necessary to amortize a loan at a specified interest rate over a specific number of periods.
The ____________________ shows the present worth of a series of future payments or deposits.
The ____________________ shows the present worth of a series of future payments or deposits.
A comparable sale property to the subject has a net operating income of $150,000 inclusive of taking real estate taxes as an expense.
The property sold for $1,500,000 and is located in the subject's tax jurisdiction,
which has a 1% effective tax rate.
The subject property has an expected net operating income of $132,000 exclusive of taking real estate taxes as an expense.
What is the subject property’s value?
A comparable sale property to the subject has a net operating income of $150,000 inclusive of taking real estate taxes as an expense.
The property sold for $1,500,000 and is located in the subject's tax jurisdiction, which has a 1% effective tax rate.
The subject property has an expected net operating income of $132,000 exclusive of taking real estate taxes as an expense.
What is the subject property’s value?
_________________ is different from yield capitalization, in that it does not directly consider the individual cash flows beyond the first year.
_________________ is different from yield capitalization, in that it does not directly consider the individual cash flows beyond the first year.
The formula value equals ______________ is one of the generic formulas used in direct capitalization.
The formula value equals ______________ is one of the generic formulas used in direct capitalization.
When property is being appraised for ad valorem tax purposes, the __________ must be included as a part of the overall capitalization rate.
When property is being appraised for ad valorem tax purposes, the __________ must be included as a part of the overall capitalization rate.
The ____________________ shows the present worth of a single future payment or deposit of $1.
The ____________________ shows the present worth of a single future payment or deposit of $1.
Flashcards
Direct Capitalization
Direct Capitalization
Converting a single year's income into value.
Direct Capitalization Formulas
Direct Capitalization Formulas
IRV (Income ÷ Rate = Value) and VIF (Value = Income × Factor).
Yield Capitalization
Yield Capitalization
A method of converting future net benefits discounted at a yield rate to present value.
Partial Payment Factor
Partial Payment Factor
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Present Worth of $1 Per Period
Present Worth of $1 Per Period
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Present Worth of $1
Present Worth of $1
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Gross Income Multiplier
Gross Income Multiplier
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Comparability Criteria
Comparability Criteria
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Effective Gross Income Multiplier
Effective Gross Income Multiplier
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Effective Tax Rate
Effective Tax Rate
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Vacant Land Amenities
Vacant Land Amenities
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Comparability Categories
Comparability Categories
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Direct Capitalization Focus
Direct Capitalization Focus
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IRV Formula
IRV Formula
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Study Notes
Direct Capitalization
- Converts a single year's income estimate into value in one step
- Simplified valuation using a capitalization rate or factor
Generic Formulas Used in Direct Capitalization
- IRV Formula: Income ÷ Rate = Value
- VIF Formula: Value = Income × Factor
- Methods efficiently convert income into value
Yield Capitalization
- Converts future net benefits into present value
- Discounts each future net benefit at a yield rate (discount rate)
- Suitable for longer-term projections
Partial Payment Factor
- Determines the periodic payment required to amortize a loan
- Calculation is based on interest rate and loan duration
- For a loan with a 0.10 factor, paying $0.10 per period for each $1 borrowed will amortize the loan
Present Worth of $1 Per Period
- Calculates the current value of a series of future payments or deposits
- Useful in financial and investment analysis
Present Worth of $1
- Determines the value today of a single payment or deposit due in the future
Gross Income Multiplier (GIM)
- Formula: Sales Price ÷ Gross Income
- Represents the ratio of a property's sales price to its gross income
- Provides a simple comparison measure
Critical Comparability Criteria for Direct Capitalization
- Land-to-Improvement Ratios
- Expense Ratios
- Remaining Economic Life (REL)
- Ensure properties are similar for reliable capitalization
Property Valuation Calculation
- Comparable property NOI (including real estate taxes): $150,000
- Comparable property sales price: $1,500,000
- Effective tax rate: 1%
- Expected subject property NOI (excluding real estate taxes): $132,000
- Calculate capitalization rate: $150,000 / $1,500,000 = 0.10
- Add effective tax rate: 0.10 + 0.01 = 0.11
- Subject property value: $132,000 / 0.11 = $1,200,000
Effective Gross Income Multiplier Calculation
- Property sales price: $2,000,000
- Potential gross income: $270,000
- Vacancy loss: $20,000
- Effective gross income: $270,000 - $20,000 = $250,000
- Effective gross income multiplier: $2,000,000 / $250,000 = 8.00
Effective Tax Rate
- A necessary component of the overall capitalization rate for ad valorem tax appraisals
- Reflects the burden of property taxes
Amenities to Consider for Vacant Land Sales
- Location
- Restrictions
- Investment (Economic) Desirability
- Utility
- Critical in evaluating vacant land sales
Comparability Categories for Improved Property Sales
- Amenities
- Land-to-Improvement Ratio
- Expense Ratios
- Remaining Economic Life
- Ensures sufficiently similar sales for capitalization rate development
Direct Capitalization vs. Yield Capitalization
- Direct capitalization differs because it doesn't consider individual cash flows beyond the first year
- Focuses on the relationship between a single year's income and value
IRV Formula in Direct Capitalization
- Formula: Income ÷ Rate = Value
- Fundamental for determining a property's value from annual income and capitalization rate
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