Property Valuation
When using the income approach, which type of property income is used for the capitalization calculation?
APotential Gross Income (PGI)
BEffective Gross Income (EGI)
CNet Operating Income (NOI)✓ Correct
DCash flow before taxes
Explanation
The capitalization approach uses Net Operating Income (NOI) — which is gross income minus vacancy/credit loss minus operating expenses, but before debt service. Value = NOI ÷ Cap Rate.
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Key Terms to Know
Net Operating Income (NOI)
The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Debt-to-Income Ratio (DTI)A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
Math Concepts
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