Which formula correctly expresses the capitalization rate (cap rate)?
Correct Answer
B) Net operating income (NOI) divided by value
Cap Rate = NOI ÷ Value (or purchase price). The capitalization rate measures the rate of return an investor can expect from an income-producing property before financing costs. The formula can be rearranged to solve for any variable: Value = NOI ÷ Cap Rate, or NOI = Value × Cap Rate. For example, a property with an NOI of $50,000 and a cap rate of 5% would have an estimated value of $1,000,000. Option A is the formula for value divided by NOI, which is not the cap rate formula.
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