Property Valuation
The capitalization rate (cap rate) used in the income approach is calculated as:
ANet operating income divided by property value✓ Correct
BGross rent multiplied by 12
CEffective gross income minus operating expenses
DTotal rent revenue divided by loan amount
Explanation
The cap rate = Net Operating Income (NOI) ÷ Property Value. It reflects the rate of return an investor would accept for a property and is derived from comparable investment sales.
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Key Terms to Know
Appraisal
A professional estimate of a property's market value prepared by a licensed or certified appraiser.
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.
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