The subject property has annual NOI of $126,000. A comparable sold for a cash-equivalent price of $2,100,000 and has annual NOI of $147,000, measured on the same basis as the subject's. Sales in the market area indicate the same price-to-income ratio applies, and no other adjustments are needed. What value is indicated for the subject, rounded to the nearest dollar?
Correct Answer
A) $1,800,000
2100000 ÷ 147000 × 126000 = 1800000. Common errors: using the comparable price without adjusting for income gives $2,100,000; inverting the income ratio gives $2,450,000; adding the income difference as dollars instead of applying the ratio gives $2,079,000.
Why This Is the Correct Answer
Option A is correct because the comparable's price-to-income ratio is $2,100,000 ÷ $147,000 = 14.2857. Applying it to the subject's NOI gives $126,000 × 14.2857 = $1,800,000. Equivalently, the comparable's overall rate of 7% applied to $126,000 gives $1,800,000.
Why the Other Options Are Wrong
Option B: $2,079,000
Option B, $2,079,000, adds the $21,000 income difference as dollars to the price: $2,100,000 + ($126,000 − $147,000). Income differences must be converted through the ratio: $2,100,000 ÷ $147,000 × $126,000 = $1,800,000.
Option C: $2,100,000
Option C, $2,100,000, is the comparable's price with no adjustment for the subject's lower income. Applying the ratio gives $2,100,000 ÷ $147,000 × $126,000 = $1,800,000.
Option D: $2,450,000
Option D, $2,450,000, inverts the income ratio: $2,100,000 ÷ $126,000 × $147,000. The correct calculation is $2,100,000 ÷ $147,000 × $126,000 = $1,800,000.
Price per income dollar
Find how many dollars of price the comparable sold for per dollar of NOI, then multiply by the subject's NOI.
How to use: Use this to check direction when applying a comparable's income ratio to a subject.
Exam Tip
A subject with lower income should show lower value when the ratio is the same. Use that as a quick check on direction.
Common Mistakes to Avoid
- -Inverting the ratio of comparable to subject income
- -Adding the income difference directly to price
- -Using the comparable price without any income adjustment
Concept Deep Dive
Analysis
This question tests applying a price-to-income relationship from a comparable to the subject. The comparable's price is divided by its NOI to get the ratio (the inverse of the overall rate), and that ratio is applied to the subject's NOI. This is equivalent to dividing subject NOI by the comparable's overall rate.
Background Knowledge
A market-derived overall capitalization rate is NOI divided by sale price, adjusted for cash equivalency. Applying that rate, or its inverse multiplier, to the subject's NOI requires that the income be measured on the same basis as the comparable's.
Real-World Application
An appraiser valuing a fourplex finds a comparable sale and extracts its overall rate from its NOI and price. Applying the same relationship to the subject's verified NOI gives an income-based value indication.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
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