In a capitalization (value) problem, which formula determines the value of a property?

In a capitalization (value) problem, which formula determines the value of a property?

• A. Value = Income / Rate
• B. Value = Rate / Income
• C. Value = Income × Rate
• D. Value = Income + Rate

Answer: (A)

In capitalization problems, value comes from the relationship between how much income the property generates and the return investors require. The cap rate is this return, and it equals NOI (annual income) divided by value: Cap Rate = NOI / Value. Rearranging gives Value = NOI / Cap Rate. So if a property produces $60,000 of NOI and the required cap rate is 8% (0.08), the value would be 60,000 / 0.08 = 750,000. This shows why dividing income by the rate determines value: higher income or a lower required return increases value. The other formulas don’t reflect the cap rate relationship: multiplying income by rate would overstate how value scales with return, rate divided by income isn’t a valid way to compute value, and adding income and rate mixes incompatible units.

In capitalization problems, value comes from the relationship between how much income the property generates and the return investors require. The cap rate is this return, and it equals NOI (annual income) divided by value: Cap Rate = NOI / Value. Rearranging gives Value = NOI / Cap Rate. So if a property produces $60,000 of NOI and the required cap rate is 8% (0.08), the value would be 60,000 / 0.08 = 750,000. This shows why dividing income by the rate determines value: higher income or a lower required return increases value. The other formulas don’t reflect the cap rate relationship: multiplying income by rate would overstate how value scales with return, rate divided by income isn’t a valid way to compute value, and adding income and rate mixes incompatible units.