Property Valuation
What is 'income capitalization' as used by Rhode Island appraisers?
ACalculating income tax on property profits
BConverting a property's annual net income into an estimate of value by dividing by a capitalization rate✓ Correct
CThe process of investing income from a property
DDetermining a property's gross income potential
Explanation
Income capitalization converts a property's annual net operating income (NOI) into a value estimate by dividing by the cap rate (Value = NOI / Cap Rate). It is the core method in the income approach to appraisal.
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Key Terms to Know
Net Operating Income (NOI)
The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
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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