7.6.8.4 Income Approach
HUD Multifamily Accelerated Processing (MAP) Guide, HUD Handbook 4430.G (2020 ed., rev. Mar. 19, 2021) · 2026 edition · updated 2026-10-05 · United States
A. The annual net operating income remaining after the payment of expenses is considered to be the primary source of value to the project. The preferred method of capitalizing the NOI into a value estimate is Direct Capitalization. Note that the overall capitalization rate verified from Actual Sales is preferable to
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Chapter 7 Valuation & Market Analysis 7.6 Appraisal Requirements
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those used in the Sales Comparison Approach or developed by the Band of Investment Model or Investor Surveys, especially in the cases where rent restrictions are factored into Criterion 3 due to legislative restrictions on rent that survive foreclosure. There are several acceptable techniques for deriving capitalization rates. All of the following should be employed and thoroughly discussed:
Comparable Sales. Rate Extraction based on recent (preferably within the past year) comparable sales is the most preferred. Pending sales are also encouraged if reliable information is available. These must include ALL of the market comparables used in the Sales Comparison Approach or an explanation must be provided. Comparables should be similar to the subject in location, design, quality of construction, and similar risk factors associated with ownership. They should also be similar in the type of expenses, specifically noting variances in deposits to reserves for replacement.
Band of Investment Model. Band of Investment is based on the premise that most properties are purchased with a combination of debt and equity. The overall capitalization rate derived by this model must satisfy the market-indicated requirements of both investment positions. Lenders anticipate obtaining a competitive interest rate commensurate with the perceived risk of the investment, and they expect the loan principal to be repaid through periodic payments. The property investors expect a competitive return through the equity capitalization rate commensurate with the perceived risk.
Published Surveys. These are to be discussed as supporting information.
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