Which formula correctly calculates the capitalization rate (cap rate)?
Correct Answer
B) Net operating income (NOI) divided by property value
The capitalization rate (cap rate) is calculated by dividing Net Operating Income (NOI) by the property value: Cap Rate = NOI ÷ Value. It expresses the rate of return an investor expects from an income-producing property, independent of financing. For example, a property generating $50,000 in NOI with a market value of $500,000 has a 10% cap rate. The formula can also be rearranged to estimate value: Value = NOI ÷ Cap Rate.
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Related Concepts
The income approach estimates a property's value based on the income it generates by converting net operating income into a value estimate using a capitalization rate. It is the preferred method for income-producing properties.
Many states have laws to limit how much property taxes can increase each year, regardless of market value fluctuations.
Various programs and exemptions exist to reduce the property tax burden for specific groups, such as seniors, homesteaders, or veterans.
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