An income-producing property generates a net operating income (NOI) of $35,000 annually. Using a capitalization rate of 7%, what is the estimated value of the property?
Correct Answer
C) $500,000
The income approach to value uses the formula: Value = NOI ÷ Capitalization Rate. Dividing the annual NOI of $35,000 by the cap rate of 7% (0.07) yields an estimated property value of $500,000. This method is commonly used to appraise income-producing properties such as apartment buildings and commercial real estate.
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Related Topics & Key Terms
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Related Concepts
The capitalization rate (Cap Rate) is the rate of return on a real estate investment based on its expected income.
Commission splits refer to the division of the total real estate commission among the listing and selling brokerages, and then between each broker and their respective agents. Commission rates and splits are always negotiable.
Determining ownership days involves calculating the number of days each party (buyer and seller) owned the property during the relevant period (usually a year). This calculation is crucial for accurate proration.
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