Property Valuation
In an income property appraisal, the capitalization rate is determined by:
ADividing the property's value by its income
BAnalyzing sales of comparable income properties (NOI ÷ sale price) to derive market cap rates✓ Correct
CUsing the statutory rate set by the LREC
DApplying the federal prime rate plus a margin
Explanation
Capitalization rates are derived from the market by analyzing sales of comparable income-producing properties — calculating the ratio of each property's NOI to its sale price to determine what investors are paying for similar income streams.
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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.
AppraisalA professional estimate of a property's market value prepared by a licensed or certified appraiser.
Net Operating Income (NOI)The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
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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