Property Valuation
The income capitalization approach estimates property value by:
AComparing recent sales of similar properties
BEstimating replacement cost minus depreciation
CDividing net operating income by the capitalization rate✓ Correct
DMultiplying gross rent by a market-derived multiplier
Explanation
The income capitalization approach calculates value as V = NOI ÷ Cap Rate. For example, a property with $50,000 NOI and a 8% cap rate would be valued at $625,000.
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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.
DepreciationA reduction in the value of an improvement (building) over time due to physical deterioration, functional obsolescence, or external factors.
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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