What formula is used to calculate value using capitalization?

The formula used to calculate value using capitalization is based on the relationship between annual income and the capitalization rate (cap rate). When you want to determine the value of a property through capitalization, you take the annual income generated by the property—such as rent or other income sources—and divide it by the cap rate.

This approach stems from the premise that the value of an investment is directly influenced by the income it produces and the expected return (rate) required by an investor. For instance, if a property generates $100,000 in annual income and the cap rate is 10% (or 0.10), the calculation would be $100,000 divided by 0.10, resulting in a property value of $1,000,000.

This formula effectively reflects the principle of capitalization, allowing investors to assess the value based on expected income and risk, and it is a fundamental concept in real estate finance.

The other options provided either involve incorrect metrics for value calculation or do not directly relate to the capitalization value analysis, making them less appropriate for accurately determining property value through this method.