A property is being appraised using the income capitalization approach. Annually, it has potential gross income of $40,000, vacancy and credit losses of $3,500, and operating expenses of $16,000. Using a capitalization rate of 8%, what is the indicated value (to the nearest $1,000) ?

Answer: $256,000

Explanation:

Given the following;

Gross income = $40,000

Vacancy and credit losses = $3,500

Operating expenses = &$16,000

Capitalization rate = 8%

Using the income capitalization approach, property is valued based based on the revenue which it could potentially generate. These includes property which could be leased, whereby money is generated from lease amount.

Cost incurred is deducted from revenue to get the net income

Net income = Gross income - cost incurred

Gross income - (Vacancy or credit losses + operating expense)

$40,000 - ($3,500+$16,000)

$40,000 - $19,500 = $20,500

Net income = $20,500

Net income : capitalization rate

$20,500 : (8:100)

$20,500 : 0.08 = $256,250

Indicated value = $256,000 (to the nearest 1000 dollar)

Value $ 256,250

rounding against nearest 1,000 dollar: 256,000

Explanation:

From the gross income we subtract the expenses and vanacy losses.

40,000 gross income - 3,500 vacancy - 16,000 operating expense

20,500 net

Now, we solve for the present value of a perpetuity given the capitalziation rate of 8%

$ 20,500 / 0.08 = $ 256,250