Property Valuation
In the income capitalization approach, a lower capitalization rate results in a:
ALower estimated property value
BHigher estimated property value✓ Correct
CNo change in value — cap rate doesn't affect value
DHigher NOI
Explanation
Value = NOI ÷ Cap Rate. A lower cap rate (denominator) produces a higher value.
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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.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
Comparable Sales (Comps)Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.
Math Concepts
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