Property Valuation
When appraising a property using the income approach, the capitalization rate is determined by:
AA. Dividing the net operating income by the property value✓ Correct
BB. Adding the mortgage rate and equity dividend rate
CC. Analyzing comparable property sales in the market
DD. Using the county assessor's assessment rate
Explanation
The capitalization rate (cap rate) = Net Operating Income ÷ Property Value. It reflects the relationship between income and value and is derived from market analysis of comparable investment properties.
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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.
Comparable Sales (Comps)Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.
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.
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