A commercial property has a gross rental income of $120,000 annually and operating expenses of $45,000. If the capitalization rate is 8%, what is the estimated property value?
Correct Answer
A) $937,500
NOI = $120,000 - $45,000 = $75,000. Property value = NOI ÷ Cap Rate = $75,000 ÷ 0.08 = $937,500. The capitalization approach divides net operating income by the cap rate to determine market value.
Why This Is the Correct Answer
Option A ($937,500) is correct because it properly applies the income capitalization formula. First, calculate Net Operating Income (NOI) by subtracting operating expenses from gross rental income: $120,000 - $45,000 = $75,000. Then divide NOI by the capitalization rate: $75,000 ÷ 0.08 = $937,500. This method is the standard approach for valuing income-producing commercial properties and is recognized under Canadian appraisal standards and real estate practice.
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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?
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