Answer: $256,000
Explanation:
Given the following ;
Gross income = $40,000
Vacancy and credit losses = $3,500
Operating expenses = &$16,000
Capitalization rate = 8%
Using the income capitalization approach, property is valued based based on the revenue which it could potentially generate. These includes property which could be leased, whereby money is generated from lease amount.
Cost incurred is deducted from revenue to get the net income
Net income = Gross income - cost incurred
Gross income - (Vacancy or credit losses + operating expense)
$40,000 -($3,500+$16,000)
$40,000 - $19,500 = $20,500
Net income = $20,500
Net income ÷ capitalization rate
$20,500 ÷ (8÷100)
$20,500 ÷ 0.08 = $256,250
Indicated value = $256,000 (to the nearest 1000 dollar)
