A commercial property generates $180,000 in annual rental income and has operating expenses of $45,000. If the capitalization rate is 8%, what is the estimated property value?
Correct Answer
D) $1,687,500
Property value is calculated using the formula: NOI ÷ Cap Rate = Value. NOI = $180,000 - $45,000 = $135,000. Value = $135,000 ÷ 0.08 = $1,687,500.
Why This Is the Correct Answer
Option D ($1,687,500) is correct because it properly applies the income capitalization formula. First, calculate Net Operating Income (NOI) by subtracting operating expenses from gross rental income: $180,000 - $45,000 = $135,000. Then divide NOI by the capitalization rate: $135,000 ÷ 0.08 = $1,687,500. This method is recognized under provincial real estate legislation and appraisal standards as a primary valuation approach for income-producing commercial properties.
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A commercial property generates $120,000 in annual rental income with operating expenses of $35,000. If the property was purchased for $850,000, what is the capitalization rate?
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