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Valuation and Analysis, 14% of the examination

Income capitalization approach

A valuation method converting a property's expected income benefits into an indication of value.

Also called: Income approach

Direct capitalization divides one stabilized year's net operating income by a market-supported capitalization rate. A gross multiplier uses gross income instead. Choose the method and income measure the question supplies rather than mixing gross income, NOI, and cash flow after debt service.

See also

Net operating income (NOI)Effective gross income less operating expenses, before debt service and before depreciation.Capitalization rateThe rate of return used to convert net operating income into value.Gross rent multiplier (GRM)Sale price divided by gross income, used as a quick comparison measure.

Test the distinction

A relevant question from Valuation and Analysis, selected because its facts or explanation use this concept.

Valuation and Analysis ยท 14%Financial Analysis

A four-unit building rents at $2,200 per unit per month with 5% vacancy and $31,000 in annual operating expenses. At a 5.5% cap rate, what is the indicated value, to the nearest thousand?

Written to DRE's published topic list. Not a real examination question, since reproducing those is a misdemeanor under B&P Code section 123.

Primary sources

Use these authorities when a course summary, forum answer, or older flashcard conflicts with the current California rule.

Where this is tested

Property Valuation and Financial AnalysisAll three official DRE valuation topics in one practical guide: value principles, the sales comparison, cost and income approaches, and the financial analysis that turns property data into a defensible answer.14%Practice Valuation and Analysis28 questions on this area, every option explained.Practice

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