Florida Real Estate Broker ExaminationValuation and Market AnalysisMedium
A real estate investor is considering purchasing a 20-unit apartment building. The building has a potential gross income of $240,000 per year, with a vacancy and collection loss allowance of 5%. Operating expenses are estimated at $70,000 annually. If the investor desires a capitalization rate of 8%, what is the estimated market value of the property using the income capitalization approach?
- A$2,262,500
- B$1,920,000
- C$2,000,000
- D$2,137,500
Show answer & explanationAnswer & explanation
Correct answer: A. $2,262,500
First, calculate the Effective Gross Income (EGI) by subtracting vacancy and collection loss from Potential Gross Income (PGI). Then, calculate the Net Operating Income (NOI) by subtracting operating expenses from EGI. Finally, divide the NOI by the capitalization rate to find the estimated market value.
Why the other options are wrong
- B. This option incorrectly uses the PGI as NOI or miscalculates the capitalization.
- C. This option is a distractor, not resulting from correct income capitalization steps.
- D. This option is a distractor, not resulting from correct income capitalization steps.
Income Capitalization Approach
An appraisal method that estimates the value of income-producing property by converting its net operating income into a value estimate.
- Value = Net Operating Income / Capitalization Rate (V = I / R).
- Used primarily for commercial and investment properties.
- Requires calculation of PGI, EGI, and NOI.
Memory trick: Income Cap: Investors capitalize on income to find value.