The value of an income-producing property can be determined using the income capitalization approach. The formula is: Value = Net Operating Income (NOI) / Capitalization Rate. The capitalization rate represents the investor's desired rate of return on their investment. In this scenario, the NOI is $174,000 and the desired capitalization rate is 8% (or 0.08).

Applying the formula:

Value = $174,000 / 0.08 = $2,175,000.

Therefore, a buyer seeking an 8% capitalization rate should be willing to pay $2,175,000 for the building.

A. $139,200 is the result of incorrectly multiplying the NOI by the capitalization rate ($174,000 0.08), which does not yield the property's value.

B. $174,000 is the Net Operating Income (NOI) for one year, not the total value of the property.

C. $1,392,000 is the result of incorrectly multiplying the NOI by 8, rather than dividing by the decimal equivalent of the percentage (0.08).

1. The Appraisal Institute. (2020). The Appraisal of Real Estate (15th ed.). The chapter on "Income Capitalization Approach" details the direct capitalization method, stating the formula as Value = Income / Rate (V=I/R). (Specifically, see Chapter 17, "Direct Capitalization").

2. Brueggeman, W. B., & Fisher, J. D. (2019). Real Estate Finance & Investments (17th ed.). McGraw-Hill Education. Chapter 7, "Valuation of Income Properties: Appraisal and the Real Estate Market," explains that the value of an income property is derived by dividing the Net Operating Income (NOI) by the capitalization rate (Ro).

3. New Jersey Real Estate Commission. (2023). New Jersey Real Estate Reference Guide. Chapter 16, "Appraising and Estimating Market Value," describes the income approach to value, outlining the use of the capitalization rate to convert net operating income into an indication of market value.