Income Properties

Summaries

MV0 = NOI1/(r-g) = NOI1/R0

R0 is the capitalization rate, affected by inflation and interest rate

1. Market extraction method to find capitalization rate:

NOI1/MV0

Accurate

Need to find comparable properties

Selling might not be current

2. Bond of Investment Method (BOI)

Capitalization rate = weighted cost of debt (interest rate + sinking cost) + weighted required rate of return of equity

Sinking cost is included because you have to set aside money yearly to pay back the principal eventually (so, FV = -1, PMT x12 is the cost, PV=0, N=12xyears, I/Y = I/12)

3. Build up methods

R0(BU)=pure rate (adjusted for tax savings)+ liquidity premium + recapture premium + risk premium

Value Income Properties

Direct Income Capitalization Approach:

MV0 = NOI1/R0

Gross Income Multiplier Technique

MV = gross income x gross income multiplier

Gross income multiplier used comparable methods