California Real Estate SalespersonProperty Valuation and Financial AnalysisMedium
An investment property generates an annual Net Operating Income (NOI) of $45,000 and recently sold for $500,000. What is the capitalization rate?
- A7%
- B11%
- C8%
- D9%
Show answer & explanationAnswer & explanation
Correct answer: D. 9%
Cap Rate = NOI ÷ Value = $45,000 ÷ $500,000 = 0.09, or 9%. The cap rate expresses the rate of return an investor expects based on income and price.
Why the other options are wrong
- A. Too low; would require NOI of only $35,000.
- B. Too high; would require NOI of $55,000.
- C. Too low; would require NOI of $40,000.
Capitalization Rate
The rate of return on a real estate investment property based on the income it is expected to generate, calculated as NOI divided by Value.
- Formula: Cap Rate = NOI ÷ Value
- Higher cap rate generally signals higher risk/return
- Used in the income approach to appraisal
Memory trick: NOI over Value—Cap rate reveals!