Exam (elaborations)
Practice of Mortgage Brokerage - AMBA with complete solutions rated A+
- Course
- Institution
Practice of Mortgage Brokerage - AMBA with complete solutions rated A+
[Show more]
Content preview
Practice of Mortgage Brokerage - AMBAIncome Capitalization Approach
Used to determine the value of a revenue-generating property; the value of a property is directly related
to the income it will generate.
Highest and Best Use
Use that supports the highest value and produces the greatest net return over a period of time. Has
significant impact on the value of the property.
ROI
Return on Investment. If I invest x dollars, how much will I get back in return? Income generating
properties must have a favorable ROI in order to interest buyers.
Gross Revenue
Revenue BEFORE expenses
Net operating income (NOI)
Gross Revenue MINUS expenses and overhead costs is NOI
Income Approach Valuation - 2 steps
1) Determine NOI
2) Determine overall property value by capitalizing NOI
,Determine NOI - 3 steps
1) find potential gross annual income (rent, parking income, laundry machine income)
2) deduct allowance for vacancies and bad debts
3) This gives you the Effective Gross Income
4) Take away operating expenses (heat, gas, property tax, etc.)
5) Answer is your NOI (AKA: NOL - Net operating Loss)
Potential Gross Annual Income
Revenue estimate based on current market rents in similar properties. Refers to 100% occupancy
situation in a rental property. Include things like parking rentals and laundry facilities.
Operating expenses in a rental property
property taxes, gas and electricity, heat, water, maintenance and repair, reserve fund contributions if
applicable, property management fees, property insurance, misc expenses such as cleaning, supplies,
etc.
Vacancies and bad debts
allowances that are a percentage of the potential gross income (vacant suites, other disruptions in
income). Based on long-term vacancy trends in the area.
Find Effective Gross Income
Gross Potential income MINUS vacancy allowance
,Find NOI
Effective Gross Income (which is your potential gross income - vacancy allowance)
MINUS
operating expenses
= NOI
Stabilizing the NOI
A vacant building with no income stream is reviewed by an appraiser by ASSUMING normal occupancy
rates and lease rates. Appraisers never use ZERO NOI.
Determine property value by capitalizing NOI
Net Annual Income (I)
DIVIDED BY
Capitalization Rate (R)
= PROPERTY VALUE (V)
How to find capitalization rate
Determined using sales data from the same market.
Net Annual Income (Or income or NOI)
DIVIDED BY
Sales price (or value)
= capitalization rate
Solving for Value in commercial property
Value =
, Income (NOI) or (I)
DIVIDED BY
capitalization rate (R)
Solving for NOI or income in commercial property
Value (property value) x rate (capitalization rate)
Solve for LTV
Loan
DIVIDED BY
Value
Capitalization rates and investor yield (rate of return)
Measure how long it will take the investment to pay itself off.
for $1million property with NOI of $100,000/year
= 10% capitalization rate (because R = I divided by V)
= 10% per year x 10 years = 100% paid off.
Property has paid for itself fully in 10 years.
**To an investor, the capitalization rate is his rate of return on investment.
The lower the capitalization rate....
The lower the rate on return of investment or
the less of amount of money the investor is making in relation to the amount they invested.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller Sakayobako30. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $19.99. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
71184 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now