Property Valuation
The capitalization rate (cap rate) is used in the income approach and is calculated as:
AGross income divided by purchase price
BNet operating income divided by property value✓ Correct
CEffective gross income minus expenses
DMortgage payment divided by property value
Explanation
Cap rate = NOI ÷ Property value (or purchase price). It measures the rate of return a property generates based on its income.
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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.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
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.
Math Concepts
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