California Real Estate Practice Exam

In the income approach to valuation, what happens to the value of a property as the capitalization rate decreases?

1. Value decreases

2. Value remains the same

3. Value increases

4. The relationship is unpredictable

The correct answer is: Value increases

In the income approach to valuation, the capitalization rate is a critical factor in determining the value of a property. A lower capitalization rate means that an investor is willing to accept a lower return on investment, which in turn means that the property's income potential is perceived to be higher. Therefore, as the capitalization rate decreases, the value of the property increases because the expected income from the property increases. Option A is incorrect because a lower capitalization rate would indicate a higher value, not a decrease. Option B is incorrect because the value of a property is affected by changes in the capitalization rate. Option D is incorrect because the relationship between capitalization rate and property value is predictable and inverse. As one decreases, the other increases.