A property sold for $2,400,000 with NOI of $168,000. Its overall rate is:
Correct Answer
C) 7.0%
Why this is correct: The overall capitalization rate (R) is calculated as Net Operating Income (NOI) divided by Sale Price (Value). The formula is R = NOI / Sale Price. Here, R = 168,000 / 2,400,000 = 0.07, which is 7.0%. Why the other choices are wrong: "0.7%, misplacing the decimal" results from dividing 168,000 by 2,400,000 and incorrectly moving the decimal. "14.3%, inverting the ratio" results from dividing the sale price by the NOI (2,400,000 / 168,000). "8.4%, adjusting for financing" introduces a financing adjustment not supported by the basic cap rate extraction formula. Exam tip: The cap rate formula is fundamental: R = NOI / Value. Always set up the division as NOI divided by Price.
Why This Is the Correct Answer
Why this is correct: The overall capitalization rate (R) is calculated as Net Operating Income (NOI) divided by Sale Price (Value). The formula is R = NOI / Sale Price. Here, R = 168,000 / 2,400,000 = 0.07, which is 7.0%. Why the other choices are wrong: "0.7%, misplacing the decimal" results from dividing 168,000 by 2,400,000 and incorrectly moving the decimal. "14.3%, inverting the ratio" results from dividing the sale price by the NOI (2,400,000 / 168,000). "8.4%, adjusting for financing" introduces a financing adjustment not supported by the basic cap rate extraction formula. Exam tip: The cap rate formula is fundamental: R = NOI / Value. Always set up the division as NOI divided by Price.
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A ground lease with 40 years remaining and fixed rent creates for the landlord:
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An appraiser is analyzing a 15-unit apartment building. Market research indicates a 6% vacancy rate is typical for similar properties, but this property's historical vacancy has averaged 4%. The subject has experienced a 1% collection loss (uncollectible rents) over the past two years. When estimating effective gross income for the subject, what vacancy and collection loss percentage should the appraiser apply?