Income Approach Flashcards

A property generates $120,000 in potential gross income and experiences a 5% vacancy and collection loss. What is the effective gross income?

Answer: $114,000

EGI = PGI minus vacancy and collection loss: $120,000 × (1 - 0.05) = $114,000.

Which expense is typically NOT deducted from effective gross income when calculating net operating income?

Answer: Mortgage debt service

Debt service (mortgage payments) is a financing cost, not an operating expense, so it is excluded from the NOI calculation.

The Gross Income Multiplier (GIM) technique divides the sale price of a comparable property by which income figure?

Answer: Potential gross income

GIM = Sale Price ÷ Potential Gross Income, making PGI the denominator in this simple multiplier approach.

An appraiser is valuing an apartment building using the direct capitalization method. The NOI is $80,000 and the cap rate is 8%. What is the indicated value?

Answer: $1,000,000

Value = NOI ÷ Cap Rate = $80,000 ÷ 0.08 = $1,000,000.

In a discounted cash flow analysis, the terminal value at the end of the holding period is typically estimated using which method?

Answer: Direct capitalization of the reversion year's NOI

The reversion (terminal) value is most commonly estimated by capitalizing the projected NOI in the year after the holding period ends.

Which of the following best describes 'economic rent' in the context of the income approach?

Answer: The market rent a property would command in an open, competitive market

Economic rent (market rent) reflects what the property would earn if leased at current market conditions, regardless of contract rent.

When using the band of investment method to derive an overall capitalization rate, which two components are weighted and combined?

Answer: Mortgage constant and equity dividend rate

Band of investment weights the mortgage constant (debt portion) and equity dividend rate (equity portion) by their respective loan-to-value ratios.