National Real Estate Exam (PSI)Real Estate CalculationsMedium
An investor purchases a rental property for $180,000. The property generates an annual net operating income of $16,200. What is the investor's rate of return (cap rate)?
- A10%
- B7%
- C9%
- D8%
Show answer & explanationAnswer & explanation
Correct answer: C. 9%
Rate of return = net operating income ÷ purchase price = $16,200 ÷ $180,000 = 0.09, or 9%.
Why the other options are wrong
- A. This would require an NOI of $18,000.
- B. This would require an NOI of about $12,600.
- D. This would require an NOI of $14,400.
Return on Investment (Cap Rate)
The rate of return on an investment property is calculated by dividing net operating income by the purchase price or value.
- ROI = income ÷ investment amount
- Also called capitalization rate for income property
- Higher NOI relative to price means higher return
Memory trick: Income over investment tells you the return