An office building generates $200,000 in gross rental income with operating expenses of $75,000. If the property was purchased for $1,250,000, what is the capitalization rate?

Q: What is the correct answer to: An office building generates $200,000 in gross rental income with operating expenses of $75,000. If the property was purchased for $1,250,000, what is the capitalization rate?

The correct answer is 10.0%. Option B (10.0%) is correct because it properly applies the capitalization rate formula: Cap Rate = NOI ÷ Property Value. First, calculate NOI by subtracting operating expenses ($75,000) from gross rental income ($200,000) to get $125,000. Then divide the NOI ($125,000) by the purchase price ($1,250,000) to get 0.10 or 10.0%. This calculation follows standard commercial real estate valuation principles used across Canadian markets and aligns with appraisal methodologies recognized under provincial real estate legislation.

Q: What background knowledge is needed for this Commercial Real Estate question?

The capitalization rate (cap rate) is calculated as Net Operating Income divided by Property Value, expressed as a percentage. NOI is gross rental income minus operating expenses (excluding debt service and depreciation). Cap rates are used for property valuation, investment comparison, and market analysis. In Canada, commercial real estate transactions must comply with provincial regulations and FINTRAC reporting requirements. Real estate professionals must understand these calculations for accurate property analysis and client advisory services. Cap rates vary by property type, with office buildings typically ranging from 4-12% depending on location, quality, and market conditions.

Q: What is a good way to remember the answer to this Commercial Real Estate question?

Remember 'Nice Operating Income Creates Accurate Percentages' - NOI (Net Operating Income) divided by CAP (Capital/Purchase price) gives you the capitalization rate percentage. Think of it as 'What percentage return am I getting on my investment after expenses?' When you see cap rate questions, immediately identify: 1) Gross income minus operating expenses = NOI, 2) NOI divided by property value = cap rate percentage. Use the acronym to ensure you calculate NOI first before applying the cap rate formula.

Q: What exam tip applies to this Commercial Real Estate question?

Always calculate NOI first by subtracting operating expenses from gross income, then divide by property value. Watch for questions that try to trick you into using gross income directly in the cap rate calculation.

Q: How does this Commercial Real Estate concept apply in real world practice?

A commercial real estate agent is helping an investor client evaluate an office building purchase. The property generates $200,000 annually in rent with $75,000 in operating expenses. At the asking price of $1,250,000, the 10% cap rate helps the client compare this investment to other opportunities and assess whether the return meets their investment criteria. The agent uses this calculation to demonstrate the property's income-generating potential and justify the purchase price in the current market.

Question

Commercial Real EstateInvestment AnalysisMEDIUM

An office building generates $200,000 in gross rental income with operating expenses of $75,000. If the property was purchased for $1,250,000, what is the capitalization rate?

Answer Options

A

6.0%

B

10.0%

C

16.0%

D

22.0%