Real Estate Appraisal Practice Exam Prep: Practice Test & Study Guide

The formula for determining value using the income approach is fundamentally centered around the concept of capitalization, which incorporates net operating income (NOI) and the capitalization rate (cap rate). In the context of real estate appraisal, the correct relationship is described as Value equaling the Net Operating Income divided by the Capitalization Rate. This is because the income approach evaluates the potential income generated by a property to estimate its value.

By dividing the NOI by the cap rate, you effectively calculate the property's value based on its income-producing potential. The cap rate serves as a metric that reflects the investor's required return on investment, taking into account the risks associated with the property. By understanding this relationship, appraisers can provide a reliable estimate of value that aligns with market expectations for income-producing properties.

In contrast, the other options presented do not accurately reflect the fundamental principles of the income approach. For instance, adding, subtracting, or multiplying the NOI by the capitalization rate does not yield a meaningful or appropriate valuation framework in this context. Thus, the division operation is essential for correctly applying the income approach in real estate appraisal.