What is the capitalization rate used in the income approach calculation?

The capitalization rate is a fundamental component in the income approach to property valuation, particularly used for commercial real estate. It represents the relationship between the income produced by a property and its overall value. The correct formulation for determining the capitalization rate is identifying it as a ratio of net income to value.

When one computes the capitalization rate using the income approach, the equation is structured as follows: the net operating income is divided by the property value. This reflects how much income an investor can expect to earn from their investment relative to how much they would need to pay for that investment. Essentially, it translates expected income into a rate of return the investor requires for entering into the investment.

In contrast, other options represent incorrect formulations. For instance, dividing value by net income would yield an inverse relationship, which does not provide the required capitalization rate. Other possible mismatches, like income over rate or rate over net income, do not conform to the established financial principles dictating property valuation. Therefore, understanding this relationship is crucial for applying the income approach accurately in appraiser practices.