Property Valuation
In the income approach to value, the capitalization rate is calculated as:
ANet Operating Income divided by Sale Price✓ Correct
BGross Rent Multiplier divided by Annual Income
CEffective Gross Income divided by Capitalization Rate
DSale Price divided by Gross Scheduled Income
Explanation
The capitalization rate (cap rate) = Net Operating Income (NOI) / Sale Price (or value). It expresses the relationship between a property's income and its value.
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Key Terms to Know
Capitalization Rate (Cap Rate)
A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Net Operating Income (NOI)The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
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