A comparable has stabilized annual NOI of $120,000 and sold at a cash-equivalent price of $1,500,000. What is the indicated overall capitalization rate?
Correct Answer
B) 8.0%
120000÷1500000×100 = 8. Common errors: reporting the price ÷ NOI multiplier as if it were the rate gives 12.5%; misplacing the decimal (×1,000 instead of ×100) gives 80.0%; misplacing the decimal (×10 instead of ×100) gives 0.8%.
Why This Is the Correct Answer
Option B is correct because $120,000 ÷ $1,500,000 = 0.08, which is 8.0%. A market-derived overall rate is net income divided by the cash-equivalent sale price.
Why the Other Options Are Wrong
Option A: 0.8%
Option A, 0.8%, comes from misplacing the decimal: 0.08 × 10 = 0.8 instead of 0.08 × 100 = 8.0. The correct rate is 8.0%.
Option C: 12.5%
Option C, 12.5%, comes from dividing price by NOI ($1,500,000 ÷ $120,000 = 12.5) and labeling the multiplier as a percentage. The overall rate is NOI ÷ price = 8.0%.
Option D: 80.0%
Option D, 80.0%, comes from misplacing the decimal the other way: 0.08 × 1,000 = 80. Multiplying 0.08 by 100 gives the correct 8.0%.
Rate is income over price
From I = R × V, the rate equals income divided by value, so NOI goes on top.
How to use: Use R = I ÷ V whenever you extract a cap rate from a sale.
Exam Tip
After dividing, convert the decimal to a percent by moving the decimal point two places, and check that the result is a plausible cap rate.
Common Mistakes to Avoid
- -Reporting the price-to-NOI multiplier as a rate
- -Moving the decimal one place instead of two
- -Moving the decimal three places instead of two
Concept Deep Dive
Analysis
This question tests overall rate extraction from a comparable sale: divide NOI by the cash-equivalent price and express the result as a percentage.
Background Knowledge
The overall capitalization rate is the ratio of one year's NOI to value or price. A price-to-NOI multiplier is its reciprocal, so a 12.5 multiplier corresponds to an 8% rate; the two should not be confused.
Real-World Application
An appraiser confirms the sale price and stabilized NOI of a neighborhood shopping center sale, divides NOI by price to extract an overall rate, and compares it with rates from other sales before reconciling a rate for the subject.
More Income Approach Questions
An undamaged but functionally inadequate system causes a supported $60,000 loss. Replacement costs $85,000 and restores only $60,000, with no other benefits. What loss classification and deduction fit?
The subject is a 10-year-old dwelling with improvement cost new of $640,000. A highly comparable 7-year-old dwelling recently sold for $580,000; at the sale date its site was worth $150,000 and its improvement cost new was $500,000. Market evidence shows depreciation accruing evenly with actual age. What is the depreciated value of the subject improvements?
Observed sale prices are $450,000, $475,000, $425,000, $500,000, $440,000. Calculate the range (maximum−minimum), to the nearest dollar.
Observed values are 100, 105, 110, 115, 120. Calculate the range (maximum−minimum).
For an arithmetic illustration only, depreciate a historical $2,000,000 construction cost on a zero-salvage straight-line 40-year schedule for 10 years. What unindexed scheduled amount remains? This is not a conclusion of current market value or current replacement cost.
For an arithmetic illustration, allocate historical construction cost $2,400,000 over 40 years on a zero-salvage equal annual schedule. After 8 years, what scheduled unindexed amount remains? This is not a current market-value conclusion.
For an arithmetic schedule only, allocate historical cost $2,500,000 over 40 years with zero residual. After 8 years, what unindexed scheduled amount remains? This is not an estimate of current market value.
The sale-price range is $45,000 and the maximum is $385,000. Find the minimum price.
A property is purchased for $1,500,000 with a loan of $1,200,000. Using the purchase price as the value, what is the loan-to-value ratio, as a percentage to one decimal?
Improvement cost new is $1,800,000. Separately supported improvement depreciation deductions of $200,000, $150,000, $100,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Related Tools
Previous Question
Observed sale prices are $180,000, $185,000, $190,000, $195,000, $200,000. Calculate the range (maximum−minimum), to the nearest dollar.
Next Question
A property has a total value of $750,000, including a site value of $200,000. The improvements have an effective age of 10 years and a total life of 50 years, with straight-line depreciation and no other loss. What is the cost new of the improvements?