An investor is analyzing two similar commercial properties: Property A has an NOI of $95,000 and asks $1,100,000; Property B has an NOI of $78,000 and asks $900,000. Assuming similar risk profiles, which represents the better investment opportunity based on cap rates?
Correct Answer
A) Property B with a cap rate of 8.67%
Property A cap rate = $95,000 ÷ $1,100,000 = 8.64%. Property B cap rate = $78,000 ÷ $900,000 = 8.67%. Property B offers a slightly higher cap rate, indicating better current income return relative to purchase price, making it the superior investment opportunity.
Why This Is the Correct Answer
Property B is correct because it offers a higher cap rate of 8.67% compared to Property A's 8.64%. The cap rate calculation for Property B is $78,000 ÷ $900,000 = 8.67%. Since both properties have similar risk profiles, the higher cap rate indicates Property B provides better current income return relative to its purchase price, making it the superior investment opportunity from a cash flow perspective.
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An investor is analyzing two similar commercial properties: Property A has a 6% cap rate and Property B has an 8% cap rate. Assuming similar NOI, what does this indicate about the relative risk and value of these properties?
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