If Annual Net Income is $60,000 and Capitalization Rate is 6% (0.06), what is the estimated Value?

If Annual Net Income is $60,000 and Capitalization Rate is 6% (0.06), what is the estimated Value?

• A. 1,000,000
• B. 900,000
• C. 750,000
• D. 600,000

Answer: (A)

Value is determined using the income capitalization approach: the property’s value equals the annual net income divided by the capitalization rate. Here, 60,000 divided by 0.06 equals 1,000,000. The cap rate represents the return an investor requires; with a 6% return, 60,000 in income implies a 1,000,000 valuation. If you used a different cap rate or a different interpretation of the income, you’d get a different value, but with these numbers the estimated value is 1,000,000.

Value is determined using the income capitalization approach: the property’s value equals the annual net income divided by the capitalization rate. Here, 60,000 divided by 0.06 equals 1,000,000. The cap rate represents the return an investor requires; with a 6% return, 60,000 in income implies a 1,000,000 valuation. If you used a different cap rate or a different interpretation of the income, you’d get a different value, but with these numbers the estimated value is 1,000,000.