Florida Real Estate Broker ExaminationValuation and Market AnalysisHard
An appraiser is tasked with valuing a multi-unit apartment complex. The property generates an annual Effective Gross Income (EGI) of $350,000. Total annual operating expenses, excluding debt service and income taxes, are $120,000. If the market capitalization rate for similar properties is 7.5%, what is the estimated market value of the apartment complex?
- A$2,900,000
- B$3,066,667
- C$3,333,333
- D$4,666,667
Show answer & explanationAnswer & explanation
Correct answer: C. $3,333,333
First, calculate the Net Operating Income (NOI): EGI - Operating Expenses = $350,000 - $120,000 = $230,000. Then, apply the income capitalization formula: Value = NOI / Capitalization Rate = $230,000 / 0.075 = $3,066,666.67, which rounds to $3,066,667.
Why the other options are wrong
- A. This is the NOI ($230,000) multiplied by 10, which is incorrect.
- B. This is the correct answer based on the calculation $230,000 / 0.075.
- D. This would be if EGI was divided by the cap rate directly, ignoring expenses.
Net Operating Income (NOI)
The income generated by an income-producing property after deducting all operating expenses, but before deducting debt service, depreciation, or income taxes.
- Crucial for the Income Capitalization Approach.
- Formula: Effective Gross Income - Operating Expenses.
- Represents the property's ability to generate income regardless of financing.
Memory trick: EGI Minus Expenses Equals NOI's Gains!