Property Valuation
An appraiser uses the income capitalization approach to value a 10-unit apartment building with a gross annual income of $120,000, vacancy and collection loss of 5%, and operating expenses of $50,000. The cap rate is 7%. What is the estimated value?
A$842,857✓ Correct
B$1,000,000
C$857,143
D$975,000
Explanation
EGI = $120,000 × (1 − 0.05) = $114,000.
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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.
Net Operating Income (NOI)The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
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.
Math Concepts
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