1. 13 Income Capitalization Approach
Based on the premise that
there is a relationship between
the income a property can earn
and the property’s value—
principle of anticipation

2. Potential Gross Income
Rent
Market (Economic) Rent
Scheduled (Contract) Rent
Historical Rent
Other Income
Laundry Facilities
Parking Spaces
Vending Machines

3. Effective Gross Income
Derived by totaling potential income from
all sources, then subtracting vacancy and
collection losses, which are affected by:
Present and past rental losses of subject
Competitive conditions in the area
Estimate of population/economic trends
Quality of tenants
Length of leases

4. Net Operating Income (NOI)
Calculated by subtracting the operating expenses of owning a property from its effective gross income
Operating expenses include:
Variable expenses
(management, wages, utilities, repairs)
Fixed expenses
(real estate taxes, insurance)
Reserves for replacement
(heating, air conditioning, roof, carpeting)

5. Expenses for Appraisal Purposes— Not Accounting Purposes
Available or probable financing not considered, except under the mortgage equity capitalization method
Income tax payments are not considered
Depreciation charges on building or other improvements not considered
Payments for capital improvements are not treated as operating expenses but are taken from replacement reserve monies

6. Operating Statement Makes use of either
Cash basis accounting in which revenue is recorded when received and expenses are recorded when paid, or
Accrual basis accounting in which revenue includes all revenue earned, whether or not received during the period; expenses recorded when incurred, whether or not they have actually been paid during the period

7. Operating Statement Ratios
Three ratios:
Operating Expenses
Effective Gross Income =
Operating Expense Ratio
Net Operating Income
Effective Gross Income =
Net Income Ratio
Operating Expenses + Debt Service
Potential Gross Income =
Break-even Ratio

8. Gross Income Multiplier
Formula:
__Sales Price__
Gross Income =
GIM
Potential gross income multiplier method considers income from all sources before any deduction for vacancy and collection losses or operating expenses
Effective gross income multiplier method deducts vacancy and collection losses from gross income before the multiplier is derived

9. Gross Income Multiplier Analysis Part 1
Sale No.
Market Value
Annual Gross Income
GIM 1
$276,000
$32,500 ? 2
$279,000
$31,000 3
$263,000
$26,300 4
$238,000
$21,600 5
$297,000
$27,000
Subject
$30,000

10. Gross Income Multiplier Analysis Part 2
Sale No.
Market Value
Annual Gross Income
GIM 1
$276,000
$32,500
8.5 2
$279,000
$31,000 9 3
$263,000
$26,300 10 4
$238,000
$21,600 11 5
$297,000
$27,000
Subject ?
$30,000

11. Gross Income Multiplier Analysis Part 3
Sale No.
Market Value
Annual Gross Income
GIM 1
$276,000
$32,500
8.5 2
$279,000
$31,000 9 3
$263,000
$26,300 10 4
$238,000
$21,600 11 5
$297,000
$27,000
Subject
$300,000
$30,000

12. Sales Price__ Gross Rent
Gross Rent Multiplier
Sales Price__ Gross Rent =
GRM
Used primarily for single-family residences that are not usually purchased as income-producing properties

13. Gross Rent Multiplier Analysis Part 1
Sale No.
Sales Price
Monthly Rental
GRM
(rounded) 1
$138,000
$1,250 ? 2
$124,000
$1,100 3
$129,500
$1,200 4
$137,000
$1,225 5
$128,000
$1,175
Subject
$1,230

14. Gross Rent Multiplier Analysis Part 2
Sale No.
Sales Price
Monthly Rental
GRM
(rounded) 1
$138,000
$1,250
110 2
$124,000
$1,100
113 3
$129,500
$1,200
108 4
$137,000
$1,225
112 5
$128,000
$1,175
109
Subject ?
$1,230

15. Gross Rent Multiplier Analysis Part 3
Sale No.
Sales Price
Monthly Rental
GRM
(rounded) 1
$138,000
$1,250
110 2
$124,000
$1,100
113 3
$129,500
$1,200
108 4
$137,000
$1,225
112 5
$128,000
$1,175
109
Subject
$136,500
$1,230
111

16. Income Approach Using URAR Form
Enter the subject property’s estimated monthly market rent
Enter the GRM applicable to the subject property
Multiply the monthly market rent estimate by the GRM
Enter the value estimate indicated by the income approach