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
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.
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