Investment decisions should be deliberate and easy. Either the income works or it doesn’t. Don’t run into an investment, don’t clog or stumble or rumble your way. Step confidently because you understand some basic foundational real estate principles. In my last blog I discussed direct capitalization. Here are the steps;
Direct Capitalization is utilized given the subject market environment, the size of the subject property, and the tendency for market participants to use direct capitalization analysis when evaluating purchase decisions for similar property.

The steps involved in capitalizing the subject’s net operating income are as follows:

· Develop the subject’s Potential Gross Income (PGI) through analysis of the subject’s actual historic income and an analysis of competitive current market income rates.

· Estimate and deduct vacancy and collection losses to develop the Effective Gross Income (EGI).

· Develop and subtract operating expenses to derive the Net Operating Income (NOI).

· Develop the appropriate capitalization rate (Ro).

Divide the net operating income by the capitalization rate for an estimate of value through the income approach.

Click to see what it looks like on paper:

So the value of this property is $3,450,000 rounded. But wait! What is the source (s) for the cap rate? Hold On! Next blog.

BBQ: “The market can stay irrational longer than you can stay solvent” by Anynomous

BLT: Hold On by the Alabama Shakes