What is the formula commonly used in direct capitalization?

The formula commonly used in direct capitalization is income divided by the capitalization rate. This approach is fundamental in real estate appraisal and investment analysis, as it provides a way to estimate the value of a property based on its expected income generation.

In direct capitalization, you determine the value of a property by taking its net operating income (NOI) and dividing it by the capitalization rate (the rate of return that investors expect). This reflects the idea that value is derived from future income potential. For instance, if a property generates an annual income of $100,000 and the prevailing market capitalization rate is 10%, the property’s estimated value would be calculated as $100,000 divided by 0.10, which equals $1,000,000.

This approach is popular because it provides a straightforward and effective means of valuing income-producing properties, making it a fundamental concept for appraisers and investors in real estate transactions. The other options do not align with the principles of direct capitalization, as they either involve operations that would not yield a valuation in this context or misinterpret the relationship between income and the capitalization rate.