The cap rate formula can be rearranged: Value = NOI / Cap Rate, or NOI = Value x Cap Rate. A higher cap rate indicates higher return but typically implies greater risk. A lower cap rate indicates lower return but suggests more stability. Cap rates are derived from comparable sales of similar income-producing properties.
An office building generates $80,000 in annual NOI and sold for $1,000,000. Cap rate = $80,000 / $1,000,000 = 8%. If a similar building generates $95,000 in NOI and the market cap rate is 8%, the value = $95,000 / 0.08 = $1,187,500.
Memorize the IRV formula: I (Income/NOI) = R (Rate/Cap Rate) x V (Value). You can solve for any variable. Remember the inverse relationship: as the cap rate goes down, value goes up. Do not confuse cap rate with interest rate or return on equity.
Related Terms
Related Concepts
Converting a percentage to a decimal involves dividing the percentage value by 100.
IRV stands for Income, Rate, and Value. It represents the relationship between Net Operating Income (I), Capitalization Rate (R), and Property Value (V).
Net Operating Income (NOI) is the revenue a property generates after deducting all operating expenses.
The gross rent multiplier (GRM) is a quick method for estimating the value of income-producing property by multiplying the property's gross rent by a factor derived from comparable sales. GRM = Sale Price / Gross Rent.
Net operating income (NOI) is the annual income generated by an income-producing property after deducting operating expenses, but before deducting mortgage payments, income taxes, and depreciation.
Frequently Asked Questions
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