Property Valuation
Which best describes the 'capitalization rate' (cap rate) used in the income approach?
AThe percentage of gross income paid in property taxes
BThe rate of return an investor expects on an income-producing property✓ Correct
CThe rate at which rent increases annually
DThe ratio of mortgage payments to income
Explanation
The capitalization rate reflects the expected rate of return on an investment property. A lower cap rate indicates higher property values and often lower risk, while a higher cap rate indicates lower values.
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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.
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.
Net Operating Income (NOI)The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
Math Concepts
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