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?
Correct Answer
B) 10.0%
Cap Rate = NOI ÷ Price. NOI = $200,000 − $75,000 = $125,000, and $125,000 ÷ $1,250,000 = 0.10, or 10.0%. The cap rate is based on net operating income, not gross rent.
Why This Is the Correct Answer
10.0% is correct. NOI = $200,000 − $75,000 = $125,000, and $125,000 ÷ $1,250,000 = 0.10, or 10.0%.
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An investor is analyzing two similar office buildings. Building A has a cap rate of 6.5% and Building B has a cap rate of 8.0%. Assuming all other factors are equal, what does this difference most likely indicate?
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