Chapter 8

Gross income is defined as:

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

The sum of all fixed and variable operating expenses and the replacement allowance cited in the appraiser's operating expense estimate" is the definition of ______ expenses: reserve total operating cash flow gross operating

Total Operating

The standard income capitalization valuation formula is: V=| + M V= M x R M=1÷R V= l÷ R

V= l÷ R

V=I/R is:

Value equals Income divided by a Rate

Potential Gross Income (PGI) is defined as:

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

Vacancy and Collection loss is defined as:

"A 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."

Replacement allowance:

"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 is calculated in the same fashion as Net 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 as follows:

"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.

Effective Gross Income (EGI) is defined this way:

"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 constitute the primary difference between gross and net income. They 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 are defined as:

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

Which of the following are government agencies? Fannie Mae and Freddie Mac Fannie Mae and FHA FHA, VA, Fannie Mae, and Freddie Mac FHA and VA

FHA and VA

Which of the following are government sponsored enterprises? Fannie Mae and Freddie Mac Fannie Mae and FHA FHA, VA, Fannie Mae, and Freddie Mac FHA and VA

Fannie Mae and Freddie Mac

Total income from a property before deducting any expenses, customarily stated on an annual basis is the definition of ? income. Net Gross Gross adjusted Effective Gross

Gross

Steps to Get to Net Operating Income

Gross Annual Rental (Potential Gross Income) + Other Income - Vacancy/Credit Loss = Effective Gross Income - Operating Expenses = Net Operating Income

FHA says a two- to four-unit dwelling with an accessory unit is: ineligible eligible eligible if it is less than 600 square feet eligible if there are at least three units

Ineligible

The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted is the definition of ___________ Income: Potential Gross Other Effective Gross Net Operating

Potential Gross

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: Net Income Modified Gross Income Gross Income Net Operating Income

Net Operating Income

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: Net Income Modified Gross Income Gross Income Net Operating Income

Net Operating Income

Operating Income Comments:

Operating income is the cash we have available. Out of that, we will have to pay for any mortgage or mortgages that may be against the property. Also, we will have to take care of any income tax charges incurred. Lenders use operating income when underwriting loans for two- to four-unit properties. They want to make sure that the projected income flow (operating income) will be sufficient to operate the property and pay off the loan.