Florida Real Estate Sales Associate Examination Content OutlineReal Estate Valuation and Market AnalysisHard
A property's net operating income (NOI) is $45,000, and the market capitalization rate for similar properties is 9%. What is the estimated value of the property using the income capitalization approach?
- A$450,000
- B$500,000
- C$550,000
- D$405,000
Show answer & explanationAnswer & explanation
Correct answer: B. $500,000
The formula for the income capitalization approach is Value = Net Operating Income / Capitalization Rate. So, $45,000 / 0.09 = $500,000.
Why the other options are wrong
- A. Incorrect calculation.
- C. Incorrect calculation.
- D. This incorrectly multiplies NOI by the cap rate ($45,000 * 0.09 = $4,050) or another calculation error.
Income Capitalization Formula
The core formula for the income capitalization approach: Value = Net Operating Income (NOI) / Capitalization Rate (Cap Rate).
- NOI is gross income minus operating expenses (before debt service and taxes).
- Cap Rate is the rate of return an investor expects on a property.
- Often remembered using the 'IRV' formula: Income / Rate = Value.
Memory trick: IRV: Income over Rate gives Value, or Income over Value gives Rate!