An income-producing property generates $120,000 in annual rental income and has operating expenses of $45,000. If investors in this market expect a 7% capitalization rate, what is the indicated value using the income approach?
Correct Answer
B) $1,071,429
The income approach uses Net Operating Income divided by the capitalization rate. NOI = $120,000 - $45,000 = $75,000. Value = $75,000 ÷ 0.07 = $1,071,429. This method converts the property's income stream into an estimated market value.
Why This Is the Correct Answer
Option B correctly applies the income approach 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 ÷ 0.07 = $1,071,429. This method capitalizes the property's income stream to determine market value based on investor expectations.
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An appraiser is valuing a unique heritage property with no recent comparable sales. The replacement cost is $800,000, land value is $300,000, and total depreciation is estimated at $200,000. What is the indicated value using the cost approach?
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An income-producing property generates $48,000 in annual net operating income. If the capitalization rate for similar properties in the area is 8%, what is the estimated property value using the income approach?