What is the formula used in direct capitalization which involves income divided by rate?

The formula used in direct capitalization is represented by the abbreviation IRV, which stands for Income divided by Rate equals Value. This mathematical relationship is fundamental in real estate appraisal, particularly when evaluating investment properties.

In this context, the "Income" refers to the net operating income (NOI) that a property generates, while the "Rate" typically refers to the capitalization rate (often expressed as a percentage) that reflects the expected rate of return on an investment in that type of property. By dividing the income by the capitalization rate, appraisers can derive the estimated value of the property.

This method is valued for its simplicity and effectiveness, especially for properties that have consistent and predictable income streams. It allows appraisers to quickly assess property value based on the income it is expected to produce, making it a vital tool for investors and appraisers alike.