Income Approach

1
Income Approach

• Dr. Jim Burton
• Marketing Real Estate
• Richards College of Business

2
Overview

• Principles Property Rights
• Definitions
• Some Symbols
• Lease Types
• Rent Types
• Cash Flow
• Rates of Return
• Estimating Rates
• Capitalization Techniques

3
Principles

• Anticipation
• Change
• Supply demand
• Substitution
• Balance

4
Property Rights

• Leased Fee
• Leasehold
• Market Value
• Investment Value

5
Definitions

• Lease
• Rent contract or market
• Net Operating Income (NOI)
• Operating Expenses fixed variable
• ValueNOI/Rate
• Equity yield rate
• Income multipliers

6
Some Symbols

• Overall cap rateRo
• Equity dividend rateRe
• Terminal cap rateRn
• Internal Rate of Return IRR
• Equity yield rateYe
• Mortgage constantRm

7
Lease Types, p. 477

• Gross
• Modified gross
• Net
• Absolute Net (AAA)
• Graduated
• Percentage
• Appraisal
• CPI increases

8
Rent Types

• Market rent
• Contract rent
• Effective rent
• Excess rent
• Percentage rent
• Overage rent

9
Cash Flow

• Potential gross income
• Less vacancies
• Effective gross income
• Less operating expenses
• Net operating income (NOI)
• Less annual debt service
• Cash Flow

10
Rates of Return

• Income rates Ro, Re, Rm
• Discount rates IRR, Yo
• Yield rates IRR, Yo, Ye
• Return on (interest)
• Return of (principal)
• Safe rate
• Market rate

11
Estimating Rates

• Degree of risks
• Future inflation
• Alternative investment rates
• Rates on comparable sales
• Mortgage rates
• Tax laws

12
Capitalization Techniques

• Direct capitalization
• Mortgage-equity analysis
• Discounted cash flow (DCF)
• PV equity PV mortgage
• Building residual
• Land residual Estimating Rates