An investor pays $1,400,000 for a property earning $98,000 NOI. A year later, NOI unchanged, similar properties trade at 6.5%. The market says the property is now worth about:
Correct Answer
A) $1,507,700 at the new market rate
Why this is correct: Value is based on current market conditions. The new market cap rate is 6.5%. Using direct capitalization: Value = NOI ÷ Cap Rate. $98,000 ÷ 0.065 = $1,507,692 (approximately $1,507,700). The property's value increased because the market now accepts a lower yield (higher price) for the same income. Why the other choices are wrong: The price paid a year ago is historical cost, not current value. The original implied rate (7%) is no longer the market rate. A 10% cap rate is arbitrary and not supported by the market data given. Exam tip: In income approach, value moves inversely with the cap rate when NOI is stable. A lower cap rate means higher value.
Why This Is the Correct Answer
Why this is correct: Value is based on current market conditions. The new market cap rate is 6.5%. Using direct capitalization: Value = NOI ÷ Cap Rate. $98,000 ÷ 0.065 = $1,507,692 (approximately $1,507,700). The property's value increased because the market now accepts a lower yield (higher price) for the same income. Why the other choices are wrong: The price paid a year ago is historical cost, not current value. The original implied rate (7%) is no longer the market rate. A 10% cap rate is arbitrary and not supported by the market data given. Exam tip: In income approach, value moves inversely with the cap rate when NOI is stable. A lower cap rate means higher value.
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Previous Question
An appraiser develops a band of investment rates for a retail strip center by analyzing local debt and equity market data. She determines a mortgage constant of 7.2% on a 75% loan-to-value mortgage with a 25-year amortization, and estimates an equity dividend rate of 11.5% based on investor surveys and recent limited-partnership placements. Assuming no income tax considerations and using the band-of-investment method, what overall capitalization rate does this support for a 75% loan-to-value financing structure?
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