Income Approach to Value Flashcards

The band of investment method derives the overall capitalization rate using:

Answer: A weighted average of mortgage and equity components

The band of investment method calculates a capitalization rate by weighting the mortgage constant and the equity dividend rate by their respective shares of total value.

Market extraction (abstraction) derives an overall capitalization rate by:

Answer: Dividing the NOI of comparable sales by their sale prices

Market extraction divides the net operating income of each comparable sale by its sale price to produce an indicated capitalization rate from actual market evidence.

A property generates an NOI of $75,000 and recently sold for $937,500. What is the extracted overall capitalization rate?

Answer: 8.0%

$75,000 ÷ $937,500 = 0.08, or 8.0%, which is the market-extracted overall capitalization rate.

Yield capitalization differs from direct capitalization primarily in that it:

Answer: Incorporates anticipated future changes in income and value over time

Yield capitalization (DCF) explicitly models year-by-year income projections and a reversion, capturing anticipated changes that direct capitalization cannot reflect.

The debt coverage ratio (DCR) method for deriving a capitalization rate requires knowing the:

Answer: Loan-to-value ratio, mortgage constant, and required DCR

The DCR method formula is R = DCR × mortgage constant × loan-to-value ratio, requiring all three of those inputs.

An assessor uses a 7.5% cap rate to value a property with a NOI of $90,000. The indicated value is approximately:

Answer: $1,200,000

$90,000 ÷ 0.075 = $1,200,000, which is the value indicated by direct capitalization.

The effective gross income multiplier (EGIM) is calculated by dividing:

Answer: Sales price by EGI

EGIM = Sale Price ÷ Effective Gross Income, producing a multiplier that can be applied to a subject property's EGI to estimate value.