An investment property has a net operating income of $36,000 and a cap rate of 8%. What is the property value?
Question & Answer
Review the question and all answer choices
$288,000
Answer A ($288,000) does not result from any standard application of the cap rate formula; it may arise from a test-taker mistakenly multiplying NOI by the cap rate ($36,000 × 8 = $288,000) rather than dividing, which is the inverse of the correct operation and a fundamental misapplication of the formula.
$450,000
$360,000
Answer C ($360,000) results from dividing $36,000 by 0.10 (a 10% cap rate) rather than the stated 8% cap rate, indicating the test-taker either misread the cap rate or defaulted to a round number instead of using the figure given in the problem.
$400,000
Answer D ($400,000) results from dividing $36,000 by 0.09 (a 9% cap rate), another common error where the test-taker uses a cap rate different from the one stated in the question, possibly confusing it with a mortgage interest rate or a different return metric mentioned in a prior problem.
Why is this correct?
Applying the income capitalization formula directly: Value = NOI ÷ Cap Rate = $36,000 ÷ 0.08 = $450,000, which is answer B. This formula is the standard tool for valuing income-producing properties and is tested on every national real estate licensing exam because it underpins commercial real estate transactions, appraisals, and investment analysis. The 8% cap rate means an investor buying this property for $450,000 would earn an 8% annual return on their investment before debt service.
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