An appraiser is valuing a 15-unit apartment building. The building generates $180,000 in annual rental income with operating expenses of $60,000. If the capitalization rate for similar properties is 8%, what is the estimated value using the income approach?

Q: What is the correct answer to: An appraiser is valuing a 15-unit apartment building. The building generates $180,000 in annual rental income with operating expenses of $60,000. If the capitalization rate for similar properties is 8%, what is the estimated value using the income approach?

The correct answer is $1,500,000. Option A ($1,500,000) is correct because it properly applies the income approach formula: Property Value = Net Operating Income ÷ Capitalization Rate. First, calculate NOI: $180,000 (gross rental income) - $60,000 (operating expenses) = $120,000. Then divide by the cap rate: $120,000 ÷ 0.08 = $1,500,000. This method is recognized under Canadian appraisal standards and provincial real estate legislation as a valid approach for valuing income-producing properties.

Q: What background knowledge is needed for this Property Valuation question?

The income approach is one of three primary valuation methods used in Canadian real estate appraisal, alongside the sales comparison and cost approaches. Net Operating Income (NOI) is calculated by subtracting all operating expenses from gross rental income, but excludes mortgage payments, depreciation, and income taxes. The capitalization rate (cap rate) represents the rate of return an investor expects from a property and varies based on property type, location, condition, and market conditions. This approach is particularly useful for income-producing properties and is recognized under provincial real estate legislation across Canada. Appraisers must be licensed and follow Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP).

Q: What is a good way to remember the answer to this Property Valuation question?

Remember 'NOI over CAP' - think of a baseball cap sitting on top of NOI. Net Operating Income goes on top (numerator), Capitalization rate goes on bottom (denominator). Like a fraction: NOI/CAP = Value. The cap 'caps off' or limits the income to determine value. When you see income approach questions, immediately think 'NOI over CAP.' First calculate NOI (gross income minus operating expenses), then divide by the cap rate. Visualize the baseball cap to remember the formula structure.

Q: What exam tip applies to this Property Valuation question?

Always calculate NOI first by subtracting ALL operating expenses from gross income. Never use gross income directly. Then divide NOI by the cap rate (as a decimal). Double-check your decimal conversion: 8% = 0.08.

Q: How does this Property Valuation concept apply in real world practice?

A real estate agent represents a client interested in purchasing a small apartment building as an investment. The seller provides financial statements showing $180,000 annual rental income and $60,000 in operating expenses. The agent researches comparable properties and determines the market cap rate is 8%. Using the income approach, the agent calculates the property value at $1,500,000, helping the client make an informed offer. This valuation method helps justify the purchase price and assists in securing financing from lenders who also use income approach analysis.

Question

Property ValuationIncome ApproachMEDIUM

An appraiser is valuing a 15-unit apartment building. The building generates $180,000 in annual rental income with operating expenses of $60,000. If the capitalization rate for similar properties is 8%, what is the estimated value using the income approach?

Answer Options

A

$1,500,000

B

$2,250,000

C

$1,200,000

D

$3,000,000