Direct Capitalization

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The Student Handbook toTHE APPRAISAL OF REAL ESTATE

Chapter 22

Direct Capitalization

Chapter 22 2Student Handbook to THE APPRAISAL OF REAL ESTATE

Capitalization Rates The ratio of the sale price to the expected net

income for the next year May be extracted from comparable sales Other methods can be used to support

capitalization rate Estimating the Overall Capitalization Rate

Extraction from the market RO = NIR/EGIM


Band of Investment—Mortgage and Equity

M (Mortgage ratio) x RM Weighted Amount

(1 – M) x RE + Weighted Amount

RO

The mortgageconstantRM can be calculatedby dividingthe annualdebtservices (ADS) by the initial amountof the mortgage. It can also becalculated on the financial calculator as follows:

N = 25 x 12

I/YR = 10/12

PV = -1

FV = 0

Solve for PMT 0.009087RM = PMT x 12 0.10904

0.75 x 0.10904 =

0.08178

0.25 x 0.13000 =

0.03250

0.11428


Band of Investment—Land and Building

L x RL = Weighted Amount

B x RB = + Weighted Amount

RO

0.75 x 0.1300 = 0.09750

0.25 x 0.0900 = + 0.0225

0.120 or 12.00%


Debt Coverage Formula

RO = M x RM x DCR

RO = 0.75 x 0.10797 x 1.2

RO = 0.09717

100,000 /0.09717 = $1,029,124


Residual Techniques

The subject has NOI of $45,000/year. The VL is $95,000.

95,000 (VL) x 0.09 (RL) = $8,550 (IL)

$45,000 (NOI) – 8,550 (IL) = 36,450 (IB)

$36,450 (IB) / 0.12 (RB) = $303,750

$303,750 + 95,000 = $398,750

The RL is 9% and the RB is 12%. What is the property value?


Gross Income Multipliers Conditions

Buyers think this way Similar expense ratios Similar upside potential

Estimation of Gross Rent Multipliers


Table 22.1 Sales and Rent Comparable Worksheet

Sale price Gross rent estimate GRM

1 $280,000 $2,500 112.00

2 320,000 2,900 110.34

3 305,000 2,750 110.91

4 275,000 2,500 110.00

5 330,000 2,900 113.79

6 325,000 2,900 112.07

7 300,000 2,700 111.11

8 298,000 2,700 110.37

9 285,000 2,500 114.00

10 290,000 2,750 105.45

Average 300,800 2,710 111.01


Problems

Suggested solutions begin on page 365.


Problems 1 and 3

Problem 1Sale 1 Sale 2 Sale 3 Sale 4

Sale Price 1,000,000 750,000 650,000 500,000 NOI 98,000 75,000 62,500 49,500 IM 9.80% 10.00% 9.62% 9.90%

75,000 / 0.0975 = 769,231$ 75,000 / 0.1000 = 750,000$

PGI 100,000V & C -7,000EGI 93,000

Fixed -35,000Variable -25,000

Net income $33,000

33,000 /0.12 = 275,000

Problem 3


Problems 5D and 6B

Problem 5DRO = 0.75 x 0.1007 = 0.0755

0.25 x 0.15 = 0.0375

0.113030,000 / 0.1130 = 265,486

Problem 6BRO = DCR x M x RM

RO = 1.25 x 0.75 x 0.1281

RO = 0.12009

75,000 /0.12009 = 624,512


Problems 7A, 8A, and 9

M 0.65 0.1069 0.0695

1-M 0.35 0.0514 (calculated) 0.0180 (calculated)

RO 0.0875

Problem 8ANOI = 150,000

550,000 (VL) x 0.0975 = 53,625 (IL)

96,375 (IB)

96,375 / 0.1225 = 786,734 (VB)

786,735 + 550,000 = 1,336,735

0.75 x 0.10484 = 0.07863

0.25 x 0.055 = 0.01375

0.09238

140,000/0.09238 = 1,515,479

Problem 9

Problem 7A


Problem 10

Sale 1

Sale 2

Sale 3

Sale 4

PGI = 23,040 EGI = 21,888 NOI = 14,488 RO = 0.0827

PGI = 20,280 EGI = 19,266 NOI = 12,516 RO = 0.0834

PGI = 19,980 EGI = 18,981 NOI = 12,381 RO = 0.0853

PGI = 19,800 EGI = 18,810 NOI = 12,360 RO = 0.0797


Problem 10

$485$500$450$435

$1,855$22,260

Vacancy and collection loss 6.00% -$1,336$20,924

$2,800$2,200$2,200

$-$7,200 -$7,200

$13,724Capitalized value $13,724 / 0.08 = $171,555

Expenses

Monthly estimated rentAnnual potential gross income

Effective gross income

Unit 1Unit 2Unit 3

Reserves for replacement

Net operating Income

Taxes InsuranceVariable expenses

Unit 4

Estimated PGI

Direct Capitalization

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