An office building with net operating income of $75,000 recently sold for $937,500.Financial data for a comparable building that is currently on the market for sale is presented in the table below.
| Annual income or expense | |
| Gross potential rental income | $300,000 |
| Estimated vacancy and collection losses | 4% |
| Insurance and taxes | $27,000 |
| Utilities | $14,000 |
| Repairs and maintenance | $21,000 |
| Depreciation | $15,000 |
| Interest rate on proposed financing | 7% |
The estimated value for the building being sold using the income approach is closest to?
A is correct because to arrive at the estimated value of the property, subtract operating expenses from gross income (300,000 - (4% × 300,000 or 12,000) - 27,000 - 14,000 - 21,000 =226,000). Then divide the net operating income by the cap rate which is derived from the recent transaction (226,000/(75,000/937,500) = 226,000/.08 = 2,825,000). Note that neither depreciation nor financing costs are deducted as operating expenses.