1. 14 Direct and Yield Capitalization
Direct Capitalization Formula
Net Operating Income Capitalization Rate =
Value
Categories of data needed for an appraisal using direct capitalization are
Potential gross income
Effective gross income
Net operating income
Capitalization rate

2. Net Operating Income Capitalization Rate=
Value = V
Net Operating Income
Value
Capitalization Rate
_I_ V = = R

3. Building a Capitalization Rate
Return of the investment, called
capital recapture
Return on the investment, called
interest rate, discount rate,
risk rate, or return on rate

4. Selecting the Rate for Capital Recapture
Straight-line Method
______100%______
Years of Useful Life =
Annual Recapture Rate

5. Selecting the Interest Rate
Market Extraction Method
Band of Investment Method
Rate required by lender is
mortgage constant
Rate required by equity investor is
equity capitalization rate,
cash on cash rate,
cash flow rate, or
equity dividend rate

6. Relationship of Capitalization Rate and Risk
High Capitalization Rate
High Risk = =
Low Value
Low Capitalization Rate
Low Risk = =
High Value

7. Capitalization Techniques Using Residual Income
Building Residual Technique can be used when appraiser knows value of the land
Land Residual Technique can be used when appraiser knows value of the structures on the land
Valuing Land and Building as a Whole

8. Yield Capitalization Real estate investment return is broken into:
Income flow for specified number of years and
2. Capital change (gain or loss) realized at end of multiyear investment period from an actual or assumed sale of the property

9. Value of One Dollar Future value of $1
Future value of an annuity of $1 per year
Sinking fund factor
Present value of a $1 reversion
Present value of an annuity of $1 per year
Payment to amortize $1

10. Annuity Method of Capitalization
Annuity is fixed return on investment
Paid weekly, monthly, quarterly, or yearly
Annuity factors table provides factor, based on interest rate and length of time of the investment, to be multiplied by desired level of yearly income to find present worth of the investment

11. Recapture Rates Under annuity method: Income stream remains constant
Interest accrues each year on decreasing principal
Recapture accounts for an increasing share of income each year

12. Recapture Rates Under straight-line method:
Income decreases yearly by same amount
Interest accrues each year on decreasing property value
Recapture remains constant for each year