California Real Estate SalespersonProperty Valuation and Financial AnalysisEasy
An appraiser is valuing a commercial property that has a Net Operating Income (NOI) of $90,000 per year. If the capitalization rate for similar properties in the market is 7.5%, what is the estimated value of the property?
- A$1,350,000
- B$1,200,000
- C$1,050,000
- D$1,500,000
Show answer & explanationAnswer & explanation
Correct answer: B. $1,200,000
To find the estimated value using the income capitalization approach, divide the Net Operating Income (NOI) by the capitalization rate (Cap Rate). $90,000 (NOI) / 0.075 (Cap Rate) = $1,200,000.
Why the other options are wrong
- A. Incorrect calculation; this would result from multiplying NOI by 15.
- C. Incorrect calculation; this would result from dividing NOI by 8.57%.
- D. Incorrect calculation; this would result from dividing NOI by 6%.
Income Capitalization Approach (IRV)
A valuation method that converts future income into a present value, typically used for income-producing properties.
- Value = Net Operating Income / Capitalization Rate
- Also known as the IRV formula (Income / Rate = Value)
- Requires accurate NOI and market-derived Cap Rate
Memory trick: Income Rate Value, Know Your Numbers