California Real Estate SalespersonProperty Valuation and Financial AnalysisEasy
A real estate appraiser is valuing a commercial property that has an annual Net Operating Income (NOI) of $120,000. Similar properties in the area are selling for a 6% capitalization rate. What is the estimated value of this property?
- A$1,200,000
- B$2,000,000
- C$1,800,000
- D$7,200
Show answer & explanationAnswer & explanation
Correct answer: B. $2,000,000
The income capitalization approach uses the formula Value = Net Operating Income / Capitalization Rate. Given an NOI of $120,000 and a cap rate of 6% (0.06), the value is $120,000 / 0.06 = $2,000,000.
Why the other options are wrong
- A. This would be an incorrect calculation, possibly dividing by 0.10 or a similar error.
- C. This would be an incorrect calculation, possibly dividing by 0.0667 or a similar error.
- D. This is an incorrect calculation, likely multiplying NOI by the cap rate.
Income Capitalization Approach (IRV)
A valuation method that converts a property's net operating income into an estimated value using a capitalization rate.
- Value (V) = Net Operating Income (NOI) / Capitalization Rate (R)
- Used primarily for income-producing properties
- Capitalization rate reflects investor's required return and risk
Memory trick: Income's Value Rests on Rate (IRV)