National Real Estate Exam (PSI)Valuation and Market AnalysisMedium
A developer plans to build a 150-unit apartment complex on a parcel of land. The developer projects a net operating income (NOI) of $1,200,000 per year from the completed complex. If a potential investor typically seeks a capitalization rate of 8% for similar investments, what is the estimated value of the apartment complex using the income capitalization approach?
- A$12,000,000
- B$15,000,000
- C$9,600,000
- D$16,000,000
Show answer & explanationAnswer & explanation
Correct answer: B. $15,000,000
The income capitalization approach uses the formula: Value = Net Operating Income (NOI) / Capitalization Rate. In this case, Value = $1,200,000 / 0.08 = $15,000,000.
Why the other options are wrong
- A. This is a plausible distractor, perhaps if the rate was miscalculated or misinterpreted.
- C. This would be NOI multiplied by the capitalization rate ($1,200,000 * 0.08), which is incorrect.
- D. This would be if the capitalization rate was 7.5% ($1,200,000 / 0.075), or another common miscalculation.
Income Capitalization Approach
An appraisal method used for income-producing properties, which estimates the present value of future income generated by the property. It converts net operating income into a value estimate.
- Formula: Value = Net Operating Income (NOI) / Capitalization Rate (Cap Rate).
- NOI is gross income minus operating expenses (before debt service and taxes).
- Cap Rate is the rate of return an investor expects to receive on their investment.
Memory trick: NOI over Cap Rate, gives property's worth, a financial forecast.