Income Approach to Valuation

1
Income Approach to Valuation

• AGEC 422
• Dr. Curtis F Lard

2
Income Capitalization Approach

• Anticipated future income and/or reversions are
  discounted to a present worth figure through the
  Capitalization Process.
• NOI Net-to-Land
• Cap Rate Cap Rate

V or

3
Steps in Income Approach to Valuation

• Define problem
• Develop appropriate budgets
• Estimate Net-to-Land or NOI
• Apply the Capitalization Formula (V NOI / Cap
  Rate)

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Assumptions

• Able to quantify benefits
• Able to estimate the Cap rate from the market

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Uses in Valuation

• Farmlands
• Ranches
• Apartments
• Income Producing Properties

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Budget

• Budget A written plan for future action,
  including the quantified anticipated results.
  What to expect money-wise from a course of action
  before that action is taken.
• Economic Costs Returns

7
Use of Budget

• Projected Profitability
• Financial Feasibility (cash flow)
• Marketing

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Value

• Net Operating Income
• Capitalization Rate

Value
9
Budget for Residential Income Property (Annual
Basis)Income

• Income
• Potential Rental Income (Duplex)
• Add Misc. Income
• Less Vacancy/Cancellation Loss
• 600/mo x 12 months 14,400
• No Misc Income 0
• 5 in Vacancy Losses 720
• Effective Gross Income 13,680

10
Budget for Residential Income Property
ContinuedFixed Expenses

• Expenses
• Fixed (does not vary with use)
• Insurance 600
• Taxes 1800
• Total Fixed Expenses 2400

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Budget for Residential Income Property
ContinuedVariable Expenses

• Expenses (continued)
• Variable (vary with use)
• Management Fee (5) 720
• Painting 120
• Exterminating 100
• Repair/Maintenance 400
• Total Variable Expenses 1340

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Budget for Residential Income Property Continued

• Other Expenses
• Replacement Reserves 480
• Total Operating Expenses
• Fixed Expenses 2400
• Variable Expenses 1340
• Replacement Reserves 480
• TOTAL EXPENSES 4220

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Budget for Residential Income Property
ContinuedNet Operating Income

• Effective Gross Income
• Total Operating Expenses
• Net Operating Income
• 13,680
• 4,220
• 9,460

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Value
Net Operating Income Capitalization
Rate 9,460 / 9.5 99,579
Value
15
Cap Rate Opportunity Cost for Long-term
capital reflects

• Interest rates
• Other rates of return
• Recapture
• Type of property
• Risks

• Nature of property
• Terms of sale
• Personal preference
• Tax bracket of capitalist
• Property taxes (rates and valuation)

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Market Cap Rate

• Market Cap Rate NOI / ASP
• NOI Net Operating Income
• ASP Adjusted Sales Price
• Cap Rate includes
• A return on investment
• A return of investment

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Examples of Cap Rates

• Properties 1, 2 3 Est. Cap
  Rate
• NOI 8148, ASP 125,952, ? 6.40
• NOI 6690, ASP 121,800, ? 5.49
• NOI 7859, ASP 124,500, ? 6.31
• Reconciliation Process Cap Rate 6.3
• Est. of Value of S.P. NOISP / 6.3