California Real Estate Practice Exam

What is the formula for calculating value using the income capitalization approach?

1. Gross Income × Capitalization Rate = Value

2. Net Operating Income + Capitalization Rate = Value

3. Net Operating Income ÷ Capitalization Rate = Value

4. Effective Gross Income ÷ Capitalization Rate = Value

The correct answer is: Net Operating Income ÷ Capitalization Rate = Value

The formula for calculating value using the income capitalization approach is net operating income divided by the capitalization rate. This is because the net operating income represents the amount of income generated by a property, while the capitalization rate is a measure of the property's rate of return. Therefore, dividing the net operating income by the capitalization rate will give us the value of the property. Option A is incorrect because it multiplies the gross income by the capitalization rate, instead of using the net operating income. Option B is incorrect because it adds the capitalization rate to the net operating income, instead of dividing it. Option D is incorrect because it uses the effective gross income, which doesn't take into account expenses, rather than the net operating income. Overall, the formula for calculating value using the income capitalization approach is the most accurate and logical choice for determining the value of a property.