Income-producing real estate is typically purchased as an investment, and from an investor's point of view earning is the critical element of property value. An investor who purchases income-producing property is essentially trading present dollars for the expectation of receiving future dollars (from both an income stream and a reversion). Rule 8(a) says in part, "The income approach to value is used in conjunction with other
approaches when the property under appraisal is typically purchased in anticipation of a money income and either has an established income stream or can be attributed a real or hypothetical income stream by comparison with other properties." The income approach to value consists of methods, techniques, and mathematical procedures that an appraiser uses to value an income producing property. If property is not being purchased for the benefits of the income it will produce, the income
approach to value is probably not an appropriate tool to use in appraising the property. As we have discussed throughout this Self-Paced Online Learning Session, the income approach to value is
based on these three premises. If the facts regarding the property being appraised do not correspond to these premises, the income approach should not be used. If the property meets the premises of the income approach, and if income and expense forecasts, remaining economic life estimates, and capitalization rates are accurate and supported by market data, the approach produces a supportable indicator of market value. Summarizing the income approach:The income approach includes any method of converting an income stream into an indicator of market value. The income approach is also called the capitalization approach because capitalization is the process of converting an expected income into an indicator of market value. The approach requires careful application because small variations in its key variables can be mathematically leveraged into a wide range of estimated value. The accuracy of the approach depends on the validity of the assumptions used to estimate its key variables. Mathematical techniques used in the approach, which are sometimes complex, are merely tools for converting these assumptions into an estimate of market value. Although several appraisal principles are relevant to the income approach, the principle of anticipation is fundamental. The principle of anticipation states that value is created by the anticipation of future benefits, which leads in fact to one definition of value as the present worth of future benefits. All income capitalization methods and techniques are attempts to convert expected future benefits into an estimate of present value. Four basic steps in the income approach
Fundamentally, income capitalization involves two processes:
Two main types of income capitalization discussed in this course
In summaryProperty Tax Rule 8, part of the California Code of Regulations, details the proper application of the income approach for the California property tax appraiser. The BOE certified property tax appraiser who understands
Training Credit for Certified Property Tax AppraisersIf you are a certified property tax appraiser or auditor-appraiser working for a California county assessor's office or the State Board of Equalization, you can obtain training credit for taking this self-paced online learning session. If you wish to obtain training credit, you must complete the online Examination at the end of this learning session and submit your answers to the State Board of Equalization's County-Assessed Properties Division using the 'Submit' button at the end of the exam. You must also complete a separate timed proctored examination in order for the course to be counted toward meeting the advanced certification requirements. Upon successful completion of the course examination and the separate proctored examination you will receive 33 hours of training credit for the online examination and 3 hours for the proctored examination. Advise your County Assessor's Training Coordinator that you have completed this online learning session and they will make arrangements for the proctored examination. By submitting the online examination, you are attesting to the fact that you have read all the lessons and have performed all the exercises in the "Check Your Knowledge" section of the training. Please do not share your answers to the Examination with anyone. What is the most difficult step in the capitalization method of appraising?DETERMINING THE APPROPRIATE CAPITALIZATION RATE IS THE MOST DIFFICULT STEP IN THE CAPITALIZATION APPROACH TO APPRAISAL.
What is a disadvantage of the direct capitalization method?The inherent weakness of direct capitalization is that the process does not take into account market cycles or idiosyncrasies of present conditions. It is not realistic to consider or assume that the typical commercial property investor will hold a property for a single year.
What are the steps in the income capitalization approach?First, calculate the net operating income based on a pro forma model. Then, find the cap rate for the appropriate market and asset class. Finally, divide the net operating income by the cap rate. The result of this calculation is the property's value based on the direct capitalization method.
What is the direct capitalization approach?What is the Direct Capitalization Method? The direct capitalization method is obtained by taking the income recorded over time and dividing it by the respective capitalization rates taken over the same period. The cap rate is obtained by dividing the net operating income by the value of the assets.
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