The direct capitalization approach equals:
Market Value = ________ / Market Capitalization Rate
Click on the arrows to vote for the correct answer
A. B. C. D.B
The direct capitalization approach =
Market Value = Annual NOI / Market Capitalization Rate
The direct capitalization approach is a method used in real estate valuation to estimate the market value of a property. It relies on the relationship between the property's net operating income (NOI) and the market capitalization rate.
The formula for the direct capitalization approach is as follows:
Market Value = NOI / Market Capitalization Rate
Where:
Given the formula, we need to identify the correct variable that should be substituted in order to estimate the market value.
Let's analyze each answer choice:
A. Monthly Gross Operating Income: The gross operating income (GOI) is the total income generated by a property before deducting operating expenses. However, in the direct capitalization approach, we need to consider the net operating income (NOI), which accounts for operating expenses. Therefore, monthly gross operating income is not the correct choice.
B. Annual NOI: The annual net operating income (NOI) is the income generated by the property after deducting operating expenses on an annual basis. This is the correct variable to use in the direct capitalization approach. By dividing the annual NOI by the market capitalization rate, we can estimate the market value of the property.
C. Annual Gross Operating Income: Similar to choice A, annual gross operating income represents the total income generated by the property before deducting operating expenses. As mentioned earlier, we need to consider the net operating income (NOI) in the direct capitalization approach. Therefore, annual gross operating income is not the correct choice.
D. Monthly NOI: The net operating income (NOI) should be expressed on an annual basis to be consistent with the market capitalization rate. Using monthly NOI would result in a mismatched time frame when dividing by the market capitalization rate. Therefore, monthly NOI is not the correct choice.
Based on the analysis above, the correct answer is B. Annual NOI. The formula for the direct capitalization approach is Market Value = Annual NOI / Market Capitalization Rate.