Valuing Property Using the Income Method
Introduction: Residential real estate is often referred to as an emotional sale, while commercial real estate is viewed as a financial sale. The reason for this difference is because commercial real estate is considered to be an alternative investment to stocks, bonds, and other financial investments.
Income producing property is always valued using income as the base. You practiced with this income valuation method in the learning activity. This assignment allows you to better understand how this particular income valuation method would be applied.
The following Course Outcomes are assessed in this assignment:
MT431-4: Calculate the value of a property using the income method.
GEL-2-03: Solve real-world problems using mathematics.
Read the scenario and address the checklist items as provided below.
Scenario: Frank and Susan Scott just became empty nesters and want to start buying investment property as a way to fund their retirement in 15 years. You have found a newer four-plex for them to buy and they are now asking you what would be a fair price to offer for this property. You show them the financial information provided on the property which shows that monthly rents are $1,100 on the two upstairs units and $1,000 a month on the two first floor units. Expenses are about $1,680 a month and taxes are 5,000 a year. You know that the yearly gross rent multiplier is (8.0) for the area.
Checklist:
Calculate the current value of the property using the Gross Rent Multiplier Method (GRM) income method. (Be sure to show your calculations.)
What is the maximum price you would recommend the Scotts should offer for the property?
Explain the strengths and weaknesses of using the GRM method as a property valuation method based on the scenario.
Explain what other methods might be used to place a value on this property.
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