In a stabilized income model, market evidence supports a vacancy allowance despite full occupancy today. Why retain that allowance?
Correct Answer
B) Value rests on typical performance over time, not this month
The allowance is explicitly supported as expected stabilized performance over time. Today’s full occupancy does not refute that forecast or prove below-market rents. Vacancy loss is not a reserve for replacing capital components; support and avoid double counting in the model.
Why This Is the Correct Answer
The allowance is explicitly supported as expected stabilized performance over time. Today’s full occupancy does not refute that forecast or prove below-market rents. Vacancy loss is not a reserve for replacing capital components; support and avoid double counting in the model.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
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Previous Question
The owner of a four-unit apartment building gives the appraiser an income statement showing effective gross income of $78,000 and these annual deductions: operating expenses of $30,000, including property taxes, insurance and reserves for replacement; mortgage interest of $12,000; tax depreciation of $8,000; and the owner's income tax on the property's earnings of $3,200. The market overall rate is 8%. What is the indicated value by direct capitalization?
Next Question
A lender underwrites a loan at a 1.25 debt coverage ratio, a 7.5% annual mortgage constant, and a 70% loan-to-value ratio. What overall capitalization rate does the debt coverage formula indicate, rounded to one decimal place?