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