Residential Sales Comparison and Income Approaches Ch 16

Potential gross income (PGI)

"The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted."

Gross income is defined as:

"Total income from a property before deducting any expenses, customarily stated on an annual basis."

A 4-unit property has two units rented at $900 per month, and two units rented at $1,200 per month. The vacancy and collection loss rate is 6%. Total operating expenses are $21,525. What is the NOI? $25,851 $47,376 $22,369 $24,087

$25,851 2 X $900 = $1,800. 2 X $1,200 = $2,400. $1,800 + $2,400 = $4,200. $4,200 X 12 = $50,400. $50,400 X .06 = $3,024. $50,400 - $3,024 = $47,376. $47,376 - $21,525 = $25,851

A 4-unit property has two units rented at $900 per month, and two units rented at $1,200 per month. The vacancy and collection loss rate is 6%. Total operating expenses are $21,525. What is the PGI? $47,376 $50,400 $55,200 $48,000

$50,400 2 X $900 = $1,800. 2 X $1,200 = $2,400. $1,800 + $2,400 = $4,200. $4,200 X 12 = $50,400.

V = I / R

V = I / R, or Value equals Income divided by a Rate.

Potential Gross Income - _________________ = Effective Gross Income. Operating expenses Vacancy and credit loss Expense ratio Replacement allowance

Vacancy and credit loss

Replacement allowance (replacement reserves)

"An allowance that provides for the periodic replacement of building components that wear out more rapidly than the building itself and must be replaced during the building's economic life; sometimes referred to as reserves or reserves for replacement.

Operating income

"Income derived from the operation of a business or real estate; indicates a stage in the profit-and-loss account where all direct costs and income from the operation have been taken into account; as distinguished from net profit or cash flow."

Net Operating Income (NOI) is defined as:

"The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income but before mortgage debt service and book depreciation are deducted. Note: This definition mirrors the convention used in corporate finance and business valuation for EBITDA (earnings before interest, taxes, depreciation, and amortization)."

Effective gross income (EGI) is defined as

"The anticipated income from all operations of the real estate after an allowance is made for vacancy and collection losses and an addition is made for any other income."

Operating expenses are defined as:

"The periodic expenditures necessary to maintain the real estate and continue production of the effective gross income, assuming prudent and competent management. See also total operating expenses."

Total operating expenses

"The sum of all fixed and variable operating expenses and the replacement allowance cited in the appraiser's operating expense estimate."

In Form 216, the income and expenses have to be projected for the next ____ months. 6 12 18 24

12

Fannie Mae Form 216 should be used when appraising Single-unit properties only Apartments up to 8 units Small commercial properties 2-4 unit residential properties plus one-unit investment properties

2-4 unit residential properties plus one-unit investment properties

"The anticipated income from all operations of the real estate after an allowance is made for vacancy and collection losses and an addition is made for any other income" is the definition of Gross income Potential gross income Effective gross income Net operating income

Effective gross income

"The anticipated income from all operations of the real estate after an allowance is made for vacancy and collection losses and an addition is made for any other income" is the definition of Operating expenses Potential gross income Effective gross income Net operating income

Effective gross income

Potential Gross Income - Vacancies and Credit Loss = ____________________. Effective gross income Total operating expenses Net operating income Expense ratio

Effective gross income

Which type of income considers vacancies? Potential gross income Effective gross income Both potential gross income and effective gross income Neither potential gross income nor effective gross income

Effective gross income

Which would NOT be considered a management expense? Plumbing repairs Collecting rent Advertising Preparing leases

Plumbing repairs

Replacement reserves might be established for all of the following items EXCEPT Roof covering Boilers Water heaters Foundations

Foundations

"The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income but before mortgage debt service and book depreciation are deducted " is the definition of Gross income Potential gross income Effective gross income Net operating income

Net operating income

Lenders use _____________ income when underwriting loans for 2 to 4 unit residential properties. Operating Potential gross Effective gross Taxable

Operating

The main difference between gross and net income is Income taxes Operating expenses Reserves for replacement Profit

Operating expenses

"The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted" is the definition of Cash flow Potential gross income Effective gross income Net operating income

Potential gross income

What is our starting point when estimating net operating income? Gross rent multiplier Potential gross income Effective gross income Operating income

Potential gross income

Which would NOT be classified as "other income"? Parking space rental Rental income Vending machine income Coin-operated washers and dryers

Rental income

In actual practice, the Operating Income Statement (Form 216) is typically prepared by: The underwriter Fannie Mae The listing real estate agent The appraiser

The appraiser

Potential gross income plus other income minus ___________ equals ______________. operating expenses, net operating income allowance for vacancies, effective gross income reserves allowance, effective gross income allowance for vacancies, net operating income

allowance for vacancies, effective gross income

Vacancy and collection loss is defined as:

deduction from potential gross income (PGI) made to reflect income reductions due to vacancies, tenant turnover, and nonpayment of rent; also called vacancy and credit loss or vacancy and contingency loss."