California Real Estate SalespersonProperty Valuation and Financial AnalysisHard
A small retail strip mall has a Net Operating Income (NOI) of $120,000 per year. The current market capitalization rate (Cap Rate) for similar properties is 8%. However, the property owner is asking $1,800,000. What is the implied capitalization rate for this asking price?
- A8.00%
- B7.50%
- C6.00%
- D6.67%
Show answer & explanationAnswer & explanation
Correct answer: D. 6.67%
The implied capitalization rate is calculated by dividing the Net Operating Income (NOI) by the asking price. Implied Cap Rate = NOI / Asking Price. So, $120,000 / $1,800,000 = 0.06666..., which is 6.67%. This is also known as the 'rate' in the IRV formula (I / V = R).
Why the other options are wrong
- A. This is the market cap rate, not the implied rate based on the asking price.
- B. Incorrect, likely from miscalculating or using a different income figure.
- C. Incorrect, likely from miscalculating or using a different income figure.
Implied Capitalization Rate
The capitalization rate derived by dividing a property's Net Operating Income (NOI) by its sales price (or asking price).
- Useful for comparing a specific property to market rates
- Indicates the return an investor would receive at that price
- Calculated as NOI / Price
Memory trick: Income Over Value Gives Rate