Make the comparable resemble the subject
A comparable sold for $620,000 and has a pool that the subject lacks. The supported market contribution of that pool is $20,000. Subtract $20,000 from the comparable's sale price to get a $600,000 adjusted indication. The comparable is superior, so adjust it downward. If it lacked a feature the subject had, the direction would reverse.
Construction cost is not automatically market contribution. A pool that cost $50,000 might contribute $20,000 to value. Use the supported adjustment stated in the problem. Reconcile multiple indicators according to their comparability and reliability; do not assume a simple average is always the appraisal conclusion.
Trace the income before choosing a formula
Potential gross income of $150,000 less 6% vacancy and collection loss leaves $141,000 effective gross income. Deduct $38,000 of stated operating expenses to obtain $103,000 NOI. Property taxes, insurance, management, and maintenance can be operating expenses. Loan payments, income taxes, and noncash depreciation are not ordinary NOI deductions. Follow the stated convention for replacement reserves.
At a stated 5% capitalization rate, $103,000 ÷ 0.05 = $2,060,000. Keep the percent as a decimal in the calculation. A property's financing does not change its NOI merely because its owner chooses a larger mortgage payment.
A gross multiplier is not a net-income capitalization rate
For a $600,000 property renting for $5,000 per month, monthly GRM is $600,000 ÷ $5,000 = 120. Annual gross rent is $60,000, so the annual gross multiplier is 10. Both calculations can be valid, but a monthly rent figure cannot be multiplied by the annual multiplier to recover value.
GRM does not separately deduct operating expenses. It is a gross-income comparison, not a shortcut for NOI analysis. Cap rates and multipliers must be supported for the property and market; the percentages in these exercises are assumptions, not prescribed California rates.
Apply it, then change one fact
A property produces $48,000 annual NOI and sells for $800,000. What is its capitalization rate?
Reasoning: $48,000 ÷ $800,000 = 0.06, or 6%. Income divided by value gives the rate. Value divided by income does not.
Change one fact: At the same $800,000 price, $40,000 NOI would imply 5%. A different mortgage payment alone would not change the property's NOI or this rate.
Keep these distinctions clear
- Sales comparison
- Adjust comparable prices for supported differences.
- Capitalization
- Value = annual NOI ÷ stated decimal rate.
- Gross rent multiplier
- Value = gross rent × multiplier for the same period.
Check the controlling rule
Current statutes and regulations control over older reference-book descriptions. Read the cited section for transaction-specific conditions and exceptions.
Frequently asked questions
Do I add or subtract when the comparable is superior?
Subtract the supported value of the superior feature from the comparable's price to make it resemble the subject. Adjust the comparable, not the subject.
Does NOI include mortgage payments?
No. Debt service reflects financing rather than property operations. Keep it outside NOI unless the task is expressly asking for a different measure such as cash flow after debt service.