A property with NOI of $96,000 sold for $1,280,000. The overall capitalization rate extracted is:
Correct Answer
D) 7.5%
Why this is correct: The overall capitalization rate (R) is extracted from a comparable sale by dividing its Net Operating Income (NOI) by its sale price (V). Calculation: R = NOI / V = $96,000 / $1,280,000 = 0.075 or 7.5%. Why the other choices are wrong: '8.2%, adjusted for typical financing' incorrectly adjusts the extracted rate. '13.3%, inverting the relationship' results from dividing price by NOI (V/NOI). '6.0%, after a management allowance' incorrectly deducts an extra expense from NOI. Exam tip: To extract a cap rate from a sale: R = NOI / Sale Price. Ensure the NOI is computed on a consistent, stabilized basis.
Why This Is the Correct Answer
Why this is correct: The overall capitalization rate (R) is extracted from a comparable sale by dividing its Net Operating Income (NOI) by its sale price (V). Calculation: R = NOI / V = $96,000 / $1,280,000 = 0.075 or 7.5%. Why the other choices are wrong: '8.2%, adjusted for typical financing' incorrectly adjusts the extracted rate. '13.3%, inverting the relationship' results from dividing price by NOI (V/NOI). '6.0%, after a management allowance' incorrectly deducts an extra expense from NOI. Exam tip: To extract a cap rate from a sale: R = NOI / Sale Price. Ensure the NOI is computed on a consistent, stabilized basis.
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