Which formula correctly expresses the capitalization rate (cap rate)?
Correct Answer
D) 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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Related Topics & Key Terms
Related Topics:
Key Terms:
Related Concepts
A transfer tax is a tax imposed on the transfer of ownership of real estate.
Reconciliation is the final step in the appraisal process where the appraiser analyzes the value indications from all applicable approaches and arrives at a single final opinion of value. It is not a simple average of the three values.
The comparable sales approach estimates a property's value by comparing it to similar properties that have recently sold in the same market area. It is the most widely used and reliable approach for appraising residential properties.
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