California Real Estate Practice Exam

Capitalization is a process by which an appraiser:

1. Converts income into value

2. Determines depreciation

3. Establishes cost

4. Finds gross income

The correct answer is: Converts income into value

Capitalization is a financial concept used in real estate appraisal that transforms income generated by a property into an estimated value for that property. This process involves applying a capitalization rate, which is derived from the rate of return that investors expect from similar investments, to the net operating income produced by the property. By dividing the net income by the capitalization rate, the appraiser can ascertain the property's value. This method is particularly useful for income-producing properties, as it provides a way to assess their worth based on their capacity to generate revenue. Understanding this process is critical for appraisers and investors alike, as it highlights the relationship between income and property valuation. Other options listed, such as determining depreciation, establishing cost, or finding gross income, do not accurately reflect the primary goal of capitalization, which focuses specifically on converting income into value.