California Real Estate Broker ExaminationValuation and AppraisalEasy
A commercial property generates a net operating income (NOI) of $90,000 per year. Comparable properties in the area have recently sold at a capitalization rate of 8%. Using the income approach, what is the estimated value of this property?
- A$720,000
- B$900,000
- C$1,125,000
- D$1,000,000
Show answer & explanationAnswer & explanation
Correct answer: C. $1,125,000
The value using the income approach (capitalization) is calculated by dividing the Net Operating Income (NOI) by the Capitalization Rate (Cap Rate). So, $90,000 / 0.08 = $1,125,000.
Why the other options are wrong
- A. This is calculated by multiplying NOI by Cap Rate, which is incorrect.
- B. This would be NOI / 0.10, which is not the given Cap Rate.
- D. This would be NOI / 0.09, which is not the given Cap Rate.
Capitalization Rate (Cap Rate)
The capitalization rate is the rate of return on a real estate investment property based on the income that the property is expected to generate. It's used to estimate the value of income-producing properties.
- Calculated as Net Operating Income / Property Value.
- Used in the income approach to valuation.
- Represents the investor's required rate of return.
Memory trick: Value is NOI over Cap Rate, a wise investor's fate.