Property Valuation
A Westchester County property generates $120,000 in annual net operating income and comparable properties have recently sold at a 6% cap rate. What is the indicated value?
A$720,000
B$1,200,000
C$2,000,000✓ Correct
D$7,200,000
Explanation
Value = NOI divided by Cap Rate = $120,000 divided by 0.06 = $2,000,000.
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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.
Comparable Sales (Comps)Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.
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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