Florida Real Estate Broker ExaminationValuation and Market AnalysisMedium
An investor is evaluating a commercial property for potential purchase. The property generates an annual net operating income (NOI) of $90,000. Similar properties in the area have recently sold at a capitalization rate (cap rate) of 8%. Using the income capitalization approach, what is the estimated value of this property?
- A$900,000
- B$720,000
- C$1,125,000
- D$1,080,000
Show answer & explanationAnswer & explanation
Correct answer: C. $1,125,000
The formula for the Income Capitalization Approach is Value = Net Operating Income / Capitalization Rate. So, $90,000 / 0.08 = $1,125,000.
Why the other options are wrong
- A. This represents NOI multiplied by 10, not divided by the cap rate.
- B. This would be NOI multiplied by the cap rate, which is an incorrect application of the formula.
- D. This would be NOI divided by 0.0833 (1/12), which is incorrect for annual cap rate.
Income Capitalization Approach
An appraisal method that estimates the value of income-producing property by converting its net operating income into a present value.
- Used for commercial and investment properties
- Formula: Value = NOI / Cap Rate
- Relies on market-derived capitalization rates
Memory trick: Income, Rate, Value – it's all about the 'IRV' triangle.