IRV Formula
IRV stands for Income, Rate, and Value. It represents the relationship between Net Operating Income (I), Capitalization Rate (R), and Property Value (V).
The IRV formula is a simple way to remember the relationship between these three key variables in real estate valuation. It's essentially a triangle where you can cover up the variable you're trying to solve for to reveal the formula. I = R x V (Income = Rate x Value), R = I / V (Rate = Income / Value), and V = I / R (Value = Income / Rate). Understanding this relationship is crucial for analyzing investment properties.
If you know the NOI is $40,000 and the cap rate is 8%, you can use the IRV formula to find the value: Value = $40,000 / 0.08 = $500,000.
Draw a triangle and label the top 'I' (Income), and the bottom corners 'R' (Rate) and 'V' (Value). This visual aid can help you quickly recall the formula during the exam.
Related Terms
Practice Questions
If a property has a net operating income of $60,000 and sells for $750,000, what is the capitalization rate?
A property has an NOI of $50,000 and a cap rate of 5%. What is the value?
Related Concepts
Net Operating Income (NOI) is the revenue a property generates after deducting all operating expenses.
The capitalization rate (Cap Rate) is the rate of return on a real estate investment based on its expected income.
In real estate, property value can be estimated by dividing the Net Operating Income (NOI) by the Capitalization Rate (Cap Rate).
Proration is the process of dividing expenses or income between the buyer and seller at the closing of a real estate transaction. This ensures each party pays or receives only their fair share based on the period of ownership.
Daily rate calculation involves determining the cost or income per day by dividing the total amount by the number of days in the period (usually a year or a month). This is a fundamental step in proration.