An investor is analyzing two similar commercial properties: Property A has an NOI of $150,000 and is priced at $2,000,000, while Property B has an NOI of $180,000 and is priced at $2,250,000. Which property offers the better investment return based on capitalization rate?
Correct Answer
A) Property B with an 8.0% cap rate
Property A cap rate: $150,000 ÷ $2,000,000 = 7.5%. Property B cap rate: $180,000 ÷ $2,250,000 = 8.0%. Property B offers a higher capitalization rate, indicating a better current income return on investment, assuming similar risk profiles.
Why This Is the Correct Answer
Property B is correct because it offers a higher capitalization rate of 8.0% compared to Property A's 7.5%. The cap rate calculation for Property B is $180,000 NOI ÷ $2,250,000 price = 8.0%. A higher cap rate indicates a better current income return on investment, assuming similar risk profiles. This makes Property B the superior investment choice based purely on income generation relative to purchase price, which is the primary measure requested in the question.
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