What is the formula for determining the value of investment property?

The correct choice is based on a standard formula used in real estate to value investment properties, which is Net Operating Income (NOI) divided by the capitalization rate (cap rate). This formula is a fundamental approach to assess the potential profitability of an income-generating property.

Net Operating Income refers to the income generated from the property after all operating expenses have been deducted but before financing costs. The capitalization rate is a metric that reflects the expected return on investment and it is calculated as the ratio of NOI to the property value.

Using the formula of NOI divided by cap rate allows investors to determine the value of the property by assessing how much income it generates relative to the perceived risk. Essentially, it offers a way to translate income into valuation, which is critical for making informed investment decisions in real estate.

In contrast, the other options utilize incorrect components or calculations. Potential gross income does not account for expenses, and effective gross income assumes captures all income but doesn't provide a direct valuation approach. Meanwhile, the cost of replacing the property isn't relevant to income valuation, as it reflects replacement costs rather than the income-producing potential of the property.