A commercial building has an NOI of $180,000 and a capitalization rate of 7.5%. What is the estimated market value of the property?
Correct Answer
A) $2,400,000
Market value under direct capitalization is Value = NOI ÷ Cap Rate. Here $180,000 ÷ 0.075 = $2,400,000. The capitalization rate converts one year of net operating income into an estimate of value for an income-producing property.
Why This Is the Correct Answer
$2,400,000 is correct because Value = NOI ÷ Cap Rate, and $180,000 ÷ 0.075 = $2,400,000. As a check, 7.5% of $2,400,000 is $180,000, which is exactly the NOI given.
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