California Real Estate SalespersonProperty Valuation and Financial AnalysisMedium
A duplex produces a Net Operating Income (NOI) of $60,000 per year. Comparable properties in the area are selling at an 8% capitalization rate. Using the income approach, what is the estimated value of the duplex?
- A$700,000
- B$750,000
- C$600,000
- D$480,000
Show answer & explanationAnswer & explanation
Correct answer: B. $750,000
Value = NOI ÷ Cap Rate = $60,000 ÷ 0.08 = $750,000. This is the standard income capitalization formula (IRV: Income ÷ Rate = Value).
Why the other options are wrong
- A. This is close but not the exact quotient of 60,000 ÷ 0.08.
- C. This would only be correct at a 10% cap rate.
- D. This results from multiplying instead of dividing incorrectly.
Income Capitalization (IRV Formula)
A method to estimate value using Income, Rate, and Value, where Value = Income ÷ Rate.
- IRV triangle: Income = Rate × Value; Rate = Income ÷ Value; Value = Income ÷ Rate
- Used heavily in commercial/income property appraisal
- Requires accurate NOI and market-derived cap rate
Memory trick: I over R equals V—cover the one you want!