Property Valuation
In the income approach to value, what does the term 'capitalization rate' represent?
AThe annual depreciation rate of the building
BThe rate of return an investor expects, used to convert NOI into value✓ Correct
CThe mortgage interest rate used in financing
DThe ratio of gross rents to operating expenses
Explanation
The capitalization rate (cap rate) represents the rate of return an investor expects from a property. It is used to convert Net Operating Income (NOI) into value: Value = NOI ÷ Cap Rate. A higher cap rate means lower value (higher expected return required), typically associated with greater risk or less desirable properties.
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