Property Valuation
Iowa agricultural land is often valued using a capitalized income approach. If a 160-acre farm generates $240 cash rent per acre and the cap rate is 4%, what is the indicated value?
A$800,000
B$960,000✓ Correct
C$1,200,000
D$1,600,000
Explanation
Total annual income = 160 × $240 = $38,400. Value = NOI ÷ Cap rate = $38,400 ÷ 0.
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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.
Adjustable-Rate Mortgage (ARM)A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.
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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