- NET OPERATING INCOME APPROACH.
Net Operating Income reflects the gain that a property will generate after taking into account operating expenses, but before deducting taxes and interest payments. Before deducting expenses, the total income obtained from the investment must be determined. This can be done by looking at rental income from comparable properties in the area. Therefore, considerable marketing research is needed at this stage.
Anticipated increments in rents are represented in the growth rate which we will incorporate in our calculation. Working costs including those that are directly brought about by day to day operations, for example, property insurance, management expenses, maintenance fees and utility expenses will also be added. So according to the net operating income approach, the value of your real estate is calculated by:
Market value = NOI/r-g = NOI/R
Where:
NOI = Net operating income
r= Required rate of return on real estate assets
g= Growth rate of NOI
R= Capitalization (Cap) rate (r-g)
- THE GROSS INCOME MULTIPLIER APPROACH
The gross income multiplier method assumes that the price of property in an area is proportional to the gross income it helps to generate. To calculate the market value using this approach, we have to take into account an element that is called a gross income multiplier. The gross income multiplier takes into account historical data and sales in an area.
The selling price of comparable properties divided by the annual gross income they generate will produce the average gross income multiplier for a region. In essence, we are saying:
Market value = gross income * gross income multiplier