If a property has a net income of $40,000 and one appraiser uses a 12% capitalization rate, while another uses a 10% rate, what is the impact of using the higher rate?

When an appraiser utilizes a higher capitalization rate, this directly affects how the net income of a property is converted into its appraised value. The capitalization rate is essentially a measure of the risk and return associated with an investment; a higher rate indicates a higher perceived risk or lower demand for the property.

In this scenario, when comparing the two capitalization rates, if one appraiser applies a 12% rate to the net income of $40,000, while another uses 10%, the higher rate will produce a lower appraised value. The formula for determining the appraised value using the capitalization rate is as follows:

Appraised Value = Net Income / Capitalization Rate

For the appraiser using the 12% capitalization rate:

Appraised Value = $40,000 / 0.12 = $333,333.33

For the other appraiser using the 10% capitalization rate:

Appraised Value = $40,000 / 0.10 = $400,000

The use of the higher capitalization rate results in a lower valuation of the property, demonstrating that the impact of the higher rate is a decrease in appraised value. This concept is fundamental in real estate appraisal, as it illustrates how the capitalization rate, which