An appraiser estimates stabilized annual NOI of $180,000 and an overall capitalization rate of 8% for the subject property. What is the indicated value, rounded to the nearest dollar?
Correct Answer
C) $2,250,000
180000÷0.08 = 2250000. Common errors: multiplying NOI by the rate instead of dividing gives $14,400; misplacing the decimal in the rate gives $225,000; shifting the rate’s decimal the other way (0.8% for 8%) gives $22,500,000.
Why This Is the Correct Answer
Option C is correct because $180,000 ÷ 0.08 = $2,250,000. Direct capitalization divides the annual NOI by the overall rate.
Why the Other Options Are Wrong
Option A: $14,400
Option A, $14,400, multiplies NOI by the rate ($180,000 × 0.08) instead of dividing. The correct value is $180,000 ÷ 0.08 = $2,250,000.
Option B: $225,000
Option B, $225,000, misplaces the decimal by using 0.8 instead of 0.08: $180,000 ÷ 0.8 = $225,000. Using 0.08 gives $2,250,000.
Option D: $22,500,000
Option D, $22,500,000, shifts the decimal the other way, treating 8% as 0.8%: $180,000 ÷ 0.008 = $22,500,000. The correct divisor is 0.08, giving $2,250,000.
Percent to decimal, two places
Move the decimal two places left to turn a percent into a decimal: 8% becomes 0.08.
How to use: Use this step before any division by a capitalization rate.
Exam Tip
Answer choices often differ by factors of ten, so check that your value is about 12.5 times the NOI at an 8% rate.
Common Mistakes to Avoid
- -Multiplying income by the rate
- -Entering 8% as 0.8 or 0.008
- -Capitalizing gross income instead of NOI
Concept Deep Dive
Analysis
This question applies V = NOI ÷ rate to a stabilized NOI of $180,000 and an 8% overall rate. The key skill is converting 8% to 0.08 and dividing rather than multiplying.
Background Knowledge
Direct capitalization converts one year's income into value with a rate drawn from the market. Rates are commonly extracted from comparable sales as net income divided by cash-equivalent price, so the same income definition must be capitalized for the subject.
Real-World Application
An appraiser values a stabilized light-industrial building with NOI of $180,000 and finds comparable sales supporting an 8% overall rate. The income approach indicates $2,250,000.
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