Income Property IV

Overview: There are some rates and ratios, which can be useful in evaluating income property. But, like all statistics, they can be confusing and misleading if based on faulty information or used in the wrong way. Stock market investors use similar indicators, such as the price-to-earnings or P/E ratio. Analysts can determine if a particular stock is over-valued or under-valued based on their knowledge of standard and historic P/E ratios. However, some companies use creative accounting methods to report their earnings, making the P/E ratio less meaningful. A yield rate is the rate of return on capital. There are all kinds of yield rates, but the one most of us know best is the interest rate. The gross rent multiplier (GRM) can be useful in estimating value because it requires only the most basic knowledge about a sale – the sale price and the annual income. The overall income capitalization rate, or cap rate, is another useful ratio for estimating real estate value. Yield rates and cap rates are related, even though they are two different things. A yield rate is a rate of return on capital, like an interest rate. Discounted cash flow analysis is different than direct capitalization – a simple process which projects only one year of stabilized income and expenses. For the vast majority of income properties, direct capitalization simulates the process used by buyers and sellers to arrive at a sale price.

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Format: HTML | Date: Jan 2003 | Pages: 1