A building has an NOI of $130,000 and is being valued with a cap rate of 4%. Using the income approach, what is the value of the building?

The income approach is a valuation method used to estimate the value of income-producing real estate. The core formula for this approach is: Value = Net Operating Income (NOI) / Capitalization Rate (Cap Rate). In this scenario, the NOI is $130,000 and the cap rate is 4% (or 0.04). By applying the formula, the calculation is $130,000 / 0.04, which equals $3,250,000. This figure represents the present value of the future income the property is expected to generate.

A. $4,130,000: This is an incorrect calculation and does not result from the proper application of the income approach formula.

B. $2,450,000: This is an incorrect calculation. It does not reflect the correct relationship between the given Net Operating Income and the capitalization rate.

D. $1,300,000: This result would be obtained by incorrectly using a 10% cap rate ($130,000 / 0.10), not the 4% rate specified in the question.

1. The Appraisal Institute. (2013). The Appraisal of Real Estate (14th ed.). The direct capitalization formula, Value = Income / Rate (V=I/R), is a fundamental concept explained in the chapter on the Income Capitalization Approach. (See Chapter 17, "Income Capitalization Approach: Direct Capitalization").

2. Virginia Department of Professional and Occupational Regulation (DPOR). (2023). Virginia Real Estate Board Licensing Regulations, 18VAC135-20-340. Curriculum for salespersons; principles and practices of real estate course. The state-mandated curriculum requires instruction on the "Valuation of real property," which includes the "Income approach to value" as a core competency for licensure.

3. Brueggeman, W. B., & Fisher, J. D. (2019). Real Estate Finance & Investments (17th ed.). McGraw-Hill Education. Chapter 9, "Valuation of Income Properties: Appraisal and the Market for Capital," explicitly details the direct capitalization method using the formula: V = NOI₁ / R₀, where V is the value, NOI₁ is the first-year Net Operating Income, and R₀ is the capitalization rate.