When using the income approach to value a rental property, which formula is typically used?
Correct Answer
D) Net operating income ÷ capitalization rate
The income approach uses Net Operating Income (NOI) divided by the capitalization rate to determine property value. NOI accounts for rental income minus operating expenses, providing a more accurate measure of the property's income-generating ability.
Why This Is the Correct Answer
Option D is correct because the income approach formula is NOI ÷ Cap Rate = Property Value. Net Operating Income represents the property's true earning capacity after deducting all operating expenses (maintenance, property taxes, insurance, management fees, vacancy allowance) from gross rental income. This formula is recognized under Canadian appraisal standards and provincial real estate legislation as the standard method for valuing income-producing properties. The capitalization rate converts the annual income stream into a present value estimate.
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