Florida Real Estate Sales Associate Examination Content OutlineReal Estate MathMedium
An investor is considering purchasing a commercial property that generates a net operating income (NOI) of $90,000 annually. Similar properties in the area have recently sold at a capitalization rate of 9%. What is the estimated market value of this property using the income capitalization approach?
- A$1,000,000
- B$1,111,111
- C$810,000
- D$900,000
Show answer & explanationAnswer & explanation
Correct answer: A. $1,000,000
The formula for the income capitalization approach is Value = Net Operating Income / Capitalization Rate. So, Value = $90,000 / 0.09 = $1,000,000.
Why the other options are wrong
- B. This would result from an incorrect division, possibly using 8% or 9.9% as the cap rate.
- C. This would be NOI multiplied by the cap rate, which is incorrect.
- D. This results from a miscalculation or using an incorrect formula.
Income Capitalization Approach
A real estate valuation method that estimates a property's value based on the income it is expected to generate, using a capitalization rate.
- Value = NOI / Cap Rate.
- Primarily used for income-producing properties.
- Cap rate reflects investor's required return.
Memory trick: Value Varies, Verify Valuation.