Net operating income, capitalization rates, and gross rent multiplier concepts used in the income approach to value.
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- What is the income approach to appraisal?
- A valuation method that estimates property value based on the income it generates
- What does NOI stand for?
- Net Operating Income
- Define net operating income (NOI).
- The annual income remaining after deducting all operating expenses from effective gross income
- What is capitalization rate (cap rate)?
- The annual net operating income expressed as a percentage of the property value
- Write the direct capitalization formula.
- Property Value = NOI / Cap Rate
- What is gross rent multiplier (GRM)?
- The ratio of property price to annual gross rental income
- Write the GRM formula.
- GRM = Property Price / Annual Gross Rental Income
- What is potential gross income (PGI)?
- The total income a property would generate if fully occupied and all rent were collected
- What are vacancy and collection losses?
- Reductions to income caused by vacant units and tenants who fail to pay rent
- What is effective gross income (EGI)?
- Potential gross income minus vacancy and collection losses
- What must be excluded from operating expenses?
- Debt service (principal and interest) and owner's income taxes
- Name four categories typically included in operating expenses.
- Property taxes, insurance, utilities, maintenance, repairs, management fees, and administrative costs
- What is direct capitalization?
- A valuation method that divides a single-year NOI by a market cap rate to estimate property value
- What is yield capitalization?
- A valuation method that discounts future cash flows over multiple years using a discount rate
- Define stabilized NOI.
- The normal, sustainable annual NOI after adjusting for non-recurring or unusual items