Property Valuation
In the income approach to value, a higher capitalization rate applied to a Montana income property would result in:
AA higher indicated property value
BA lower indicated property value, reflecting greater perceived risk✓ Correct
CNo change in value since NOI remains the same
DA higher NOI estimate
Explanation
Value = NOI ÷ Cap Rate. As the cap rate increases (reflecting greater investor risk), the denominator increases and the resulting value decreases.
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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.
AppraisalA professional estimate of a property's market value prepared by a licensed or certified appraiser.
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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