Module 42.2 LOS 42.g: Direct Capitalization Approach

In the direct capitalization approach to property valuation, we discount or “capitalize” first year NOI by the capitalization rate.

NOI is the amount of income remaining after subtracting vacancy and collection losses, and operating expenses (e.g., insurance, property taxes, utilities, maintenance, and repairs) from potential gross income.

NOI = full occupancy rental income + other income – vacancy and collection loss – operating expense

cap rate = discount rate − growth rate

Gross income multiplier =  sales price/gross income

Value = gross income x gross income multiplier

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