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Question:

Harry is hired to appraise an apartment complex in a populous area close to areas of employment. To determine the property’s value based on the property’s future income and operating expenses, Harry divides the property’s net operating income (NOI) by a capitalization rate (cap rate). What appraisal method does this practice best represent?

A Capitalization method.
Explaination

The capitalization method is the best answer of the selections provided. The capitalization method is used by an appraiser to arrive at a property’s value based on the present worth of a property’s future net operating income. Answer Gross rent multiplier method uses the potential or gross rent multiplied by a gross rent multiplier (GRM) to determine value. Both of these answers are methodologies applied under the income approach that is used for properties that generate rental income. Note answer Income method incorrectly uses the term “method” versus “approach,” and can thus be eliminated.