Texas Real Estate Sales Agent ExamValuation and Market AnalysisMedium
An appraiser is valuing a commercial property that has a net operating income (NOI) of $120,000 per year. 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$9,600,000
- B$1,200,000
- C$960,000
- D$1,500,000
Show answer & explanationAnswer & explanation
Correct answer: D. $1,500,000
The formula for the income capitalization approach is Value = Net Operating Income / Capitalization Rate. Given NOI = $120,000 and Cap Rate = 8% (or 0.08), the calculation is $120,000 / 0.08 = $1,500,000.
Why the other options are wrong
- A. This would be if the cap rate was 0.0125, or if NOI was much higher. Incorrect calculation.
- B. This would imply a cap rate of 10% or 0.1, which is incorrect based on the given information.
- C. This is NOI multiplied by the cap rate ($120,000 * 0.08), which is incorrect for finding value.
Income Capitalization Formula
The formula used in the income capitalization approach to determine property value: Value = Net Operating Income (NOI) / Capitalization Rate (Cap Rate).
- Value = NOI / Cap Rate
- Cap Rate is expressed as a decimal.
- Used for income-producing properties.
Memory trick: Think 'I' 'R' 'V': 'I'ncome 'R'ate 'V'alue. If you know two, you find the third!