Property Valuation
In the income approach, what does the capitalization rate (cap rate) represent?
AThe property's loan-to-value ratio
BThe rate of return an investor expects from the property✓ Correct
CThe percentage of gross income that covers expenses
DThe annual appreciation rate of the property
Explanation
The cap rate represents the expected rate of return on a real estate investment, calculated as Net Operating Income ÷ Property Value.
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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.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
Net Operating Income (NOI)The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
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