Property Valuation
An appraiser is using the income approach to value a commercial property. The property generates $120,000 in gross rents annually, with vacancy and collection losses of 5% and operating expenses of $40,000. If the cap rate is 8%, what is the indicated value?
A$1,500,000
B$975,000
C$1,000,000
D$875,000✓ Correct
Explanation
NOI = Gross Rents − Vacancy − Operating Expenses. Effective Gross Income = $120,000 × (1 − 0.05) = $114,000. NOI = $114,000 − $40,000 = $74,000. Value = NOI ÷ Cap Rate = $74,000 ÷ 0.08 = $925,000.95 = $114,000 − $40,000 = $74,000 ÷ 0.08 = $925,000. The correct answer based on the calculation is closest to $975,000 but let's recalculate: $74,000 ÷ 0.08 = $925,000.
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