Florida Real Estate Broker ExaminationValuation and Market AnalysisEasy
A real estate broker is advising a client on the valuation of a commercial property. The property is a 30-year-old office building with a net operating income (NOI) of $120,000 and a capitalization rate of 8%. The client wants to know the estimated market value of the property using the income capitalization approach. What is the estimated market value?
- A$960,000
- B$1,200,000
- C$1,000,000
- D$1,500,000
Show answer & explanationAnswer & explanation
Correct answer: D. $1,500,000
The income capitalization approach uses the formula: Value = Net Operating Income / Capitalization Rate. In this case, $120,000 / 0.08 = $1,500,000.
Why the other options are wrong
- A. This would be the result if NOI was multiplied by the cap rate, which is incorrect.
- B. This is an incorrect calculation; it might result from multiplying NOI by 10.
- C. This is an incorrect calculation; it might result from dividing NOI by 0.12.
Income Capitalization Approach
A valuation method that converts the income generated by a property into an estimate of its value.
- Used primarily for income-producing properties.
- Formula: Value = Net Operating Income / Capitalization Rate.
- Relies on the principle of anticipation.
Memory trick: Income, Cap, Value: It's an Investor's View!