A property generating $210,000 NOI is valued at $2,625,000. The implied overall rate is:
Correct Answer
B) 8.0%
Why this is correct: The overall capitalization rate (OAR) is calculated as Net Operating Income divided by Value. OAR = NOI / Value. Here, OAR = 210,000 / 2,625,000. Perform the division: 210,000 ÷ 2,625,000 = 0.08, which is 8.0%. Why the other choices are wrong: "12.5%, inverting the calculation" results from dividing value by income (2,625,000 / 210,000 = 12.5). "6.4%, using a different income figure" is not supported by the given numbers. "0.8%, misplacing the decimal" results from 210,000 / 2,625,000 = 0.08, but misreading it as 0.8%. Exam tip: The cap rate triangle: Cover the variable you want. Cover Value: NOI / Rate. Cover NOI: Value * Rate. Cover Rate: NOI / Value.
Why This Is the Correct Answer
Option B is correct because the overall rate is net operating income divided by value: $210,000 divided by $2,625,000 equals 0.08, or 8.0 percent. You can sanity-check it in reverse, since 8 percent of $2,625,000 returns $210,000 exactly. An 8 percent overall rate is also plausible for income property, which is a useful reasonableness screen. Note that this is an overall rate derived from a single transaction, so in practice you would extract rates from several sales before concluding one.
Why the Other Options Are Wrong
Option A: 12.5%, inverting the calculation
12.5 percent comes from flipping the fraction and dividing value by income, which produces 12.5 as a multiplier rather than a rate. That figure is actually the net income multiplier, the reciprocal of the cap rate, and it is expressed as a number of years' income rather than a percentage. Labeling it 12.5 percent attaches a percent sign to something that is not a rate.
Option C: 6.4%, using a different income figure
6.4 percent cannot be produced from the two figures given by any correct operation. It corresponds to an income of roughly $168,000 against this value, which is not the stated net operating income. Its role is to attract a candidate who is estimating rather than dividing.
Option D: 0.8%, misplacing the decimal
0.8 percent is the right division with the decimal moved one place. The quotient 0.08 becomes 8.0 percent, not 0.8 percent, because converting a decimal to a percentage shifts the point two places to the right. A 0.8 percent overall rate would imply a property selling for 125 times its net income, which no income market supports.
Cover the corner of IRV
Draw a triangle with I on top and R and V side by side beneath. Cover the letter you want: cover V and you see I over R; cover R and you see I over V; cover I and you see R next to V, meaning multiply. Income always sits on top, so income is always the numerator.
How to use: Identify which two values the stem gives you, cover the missing one, and read the operation off the triangle. Then move the decimal two places and check the result against a plausible market rate before selecting.
Exam Tip
Verify by multiplying back. If your rate times the value does not reproduce the stated income, you inverted the fraction or misplaced the decimal.
Common Mistakes to Avoid
- -Dividing value by income and calling the result a rate
- -Converting 0.08 to 0.8 percent instead of 8.0 percent
- -Using effective gross income or pre-expense income in place of net operating income
- -Deducting debt service or depreciation before computing net operating income
Concept Deep Dive
Analysis
This tests the IRV relationship, the single most reusable formula in the income approach. Income equals rate times value, so the three rearrangements are value equals income divided by rate, rate equals income divided by value, and income equals rate times value. When a sale price and its net operating income are both known, dividing income by price extracts the overall capitalization rate the market actually paid, which is how appraisers derive rates from comparable sales rather than borrowing them from surveys. Here $210,000 divided by $2,625,000 gives 0.08. The other skill being tested is decimal discipline, because a rate expressed as a decimal must be multiplied by 100 to become a percentage, and the answer choices are built from the specific ways candidates fumble that conversion.
Background Knowledge
You need the IRV triangle and the ability to solve for any leg. You also need to know that the overall capitalization rate relates a single year's net operating income to total property value, that it is extracted from comparable sales, and that the reciprocal of the rate is the net income multiplier.
Real-World Application
Deriving a rate for an office building assignment, you pull four recent sales, verify each buyer's net operating income with the broker, and compute the indicated overall rate for each. The extracted rates cluster near 8 percent, which supports the rate you apply to the subject far better than a published survey range would.
More Income Approach Questions
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