New York Real Estate Salesperson ExaminationValuation and Market AnalysisHard
A real estate investor is analyzing a potential apartment building purchase. The building has 10 units, each renting for $1,500 per month. Annual operating expenses are estimated at $40,000, and the investor seeks a capitalization rate of 8%. What is the estimated market value of the property using the income capitalization approach?
- A$2,250,000
- B$1,975,000
- C$1,875,000
- D$2,625,000
Show answer & explanationAnswer & explanation
Correct answer: B. $1,975,000
First, calculate the annual gross income (10 units * $1,500/month * 12 months = $180,000). Then, calculate the Net Operating Income (NOI) by subtracting annual operating expenses ($180,000 - $40,000 = $140,000). Finally, divide the NOI by the capitalization rate ($140,000 / 0.08 = $1,750,000).
Why the other options are wrong
- A. Incorrect calculation, likely using gross income instead of NOI.
- C. Incorrect calculation, likely missing NOI or cap rate error.
- D. Incorrect calculation, likely using a wrong capitalization rate or income figure.
Income Capitalization Approach
An appraisal method used for income-producing properties that converts expected future income into a present value.
- Value = Net Operating Income (NOI) / Capitalization Rate (Cap Rate).
- Used for commercial and investment properties.
- Requires accurate income and expense projections.
Memory trick: Income's Value is NOI over Cap Rate.