A commercial property has a gross rental income of $120,000 annually, operating expenses of $35,000, and comparable properties are selling at a 7.5% cap rate. Using the income approach, what is the estimated property value?
Correct Answer
D) $1,133,333
First calculate NOI: $120,000 - $35,000 = $85,000. Then divide by cap rate: $85,000 ÷ 0.075 = $1,133,333. The income approach requires using net operating income, not gross income, in the calculation.
Why This Is the Correct Answer
Option D correctly applies the income approach formula. First, calculate Net Operating Income (NOI) by subtracting operating expenses from gross rental income: $120,000 - $35,000 = $85,000. Then apply the capitalization rate formula: Property Value = NOI ÷ Cap Rate = $85,000 ÷ 0.075 = $1,133,333. This method properly uses NOI, not gross income, which is essential for accurate valuation.
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A commercial property generates $180,000 in gross rental income annually. Operating expenses are $45,000, and the property is valued using a 7% capitalization rate. What is the indicated value using the income approach?
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A commercial property in Calgary generates $120,000 annual net operating income. Using a capitalization rate of 8%, what is the estimated value using the income approach?