A commercial property generates annual rental income of $120,000 with operating expenses of $25,000. Using a capitalisation rate of 7.5%, what is the property's value using the capitalisation approach?
Correct Answer
A) $1,266,667
The capitalisation approach uses Net Operating Income divided by the capitalisation rate. NOI = $120,000 - $25,000 = $95,000. Value = $95,000 ÷ 0.075 = $1,266,667.
Why This Is the Correct Answer
Net operating income is $120,000 less $25,000, which is $95,000. Dividing by the rate gives $95,000 divided by 0.075, or $1,266,667.
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A commercial property generates $120,000 annual net income. Using a capitalisation rate of 8%, what is the estimated value using the capitalisation approach?
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