If an income property was appraised at $100,000 based on a 6% capitalization rate, what would be the value if an 8% capitalization rate is used?

To determine the new value of the income property using an 8% capitalization rate, first, it is essential to understand how capitalization rates work. The capitalization rate (cap rate) reflects the return on investment that an investor expects from a property. The formula to find the value of the property based on the cap rate is:

Value = Net Operating Income (NOI) / Capitalization Rate

From the original appraisal at a 6% cap rate, the value of the property was $100,000. We can rearrange the formula to find the Net Operating Income (NOI):

NOI = Value * Capitalization Rate NOI = $100,000 * 0.06 NOI = $6,000

With the NOI established, we can now apply the new capitalization rate of 8% to determine the property’s value:

Value = NOI / Capitalization Rate Value = $6,000 / 0.08 Value = $75,000

This calculation shows that when the capitalization rate increases to 8%, the value of the property decreases to $75,000. This drop in value is due to the higher cap rate reflecting a higher perceived risk or lower demand for expected returns, which directly impacts