Property Valuation
In the income approach, what formula is used to calculate property value?
AValue = NOI × Cap Rate
BValue = NOI ÷ Cap Rate✓ Correct
CValue = GRM × Monthly Rent
DValue = Cost − Depreciation
Explanation
In the income approach, Value = Net Operating Income (NOI) ÷ Capitalization Rate. A higher cap rate produces a lower value; a lower cap rate produces a higher value.
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Key Terms to Know
Depreciation
A reduction in the value of an improvement (building) over time due to physical deterioration, functional obsolescence, or external factors.
Comparable Sales (Comps)Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
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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