A commercial property generates $120,000 in annual rental income and has operating expenses of $35,000. If the capitalization rate is 8%, what is the estimated property value?
Correct Answer
C) $1,062,500
First calculate NOI: $120,000 − $35,000 = $85,000. Then Value = NOI ÷ Cap Rate = $85,000 ÷ 0.08 = $1,062,500. The income approach capitalizes net income, not gross income.
Why This Is the Correct Answer
$1,062,500 is correct. NOI = $120,000 − $35,000 = $85,000, and $85,000 ÷ 0.08 = $1,062,500. Check: 8% of $1,062,500 is $85,000.
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