Property Valuation
The ratio of a property's net operating income to its market value, used to estimate the value of income-producing property.
The capitalization rate (cap rate) is used in the income approach to valuation. It expresses the relationship between a property's annual net operating income (NOI) and its value or sale price. The formula is: Cap Rate = NOI ÷ Value. To find value when you know the cap rate: Value = NOI ÷ Cap Rate. A higher cap rate generally indicates higher risk and a lower purchase price relative to income. Cap rates vary by property type, location, and market conditions.
Exam Tip
Memorize: Value = NOI ÷ Cap Rate. If NOI is $50,000 and cap rate is 10%, value is $500,000. The exam tests this formula in multiple variations.
Study Guide
Property Valuation
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Practice
NY Real Estate Property Valuation
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