Property Valuation
A property generates a net operating income of $30,000 per year. Using a capitalization rate of 6%, what is the indicated value?
A$180,000
B$500,000✓ Correct
C$300,000
D$450,000
Explanation
Value = NOI ÷ Cap Rate = $30,000 ÷ 0.06 = $500,000.
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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.
AppraisalA professional estimate of a property's market value prepared by a licensed or certified appraiser.
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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