Florida Real Estate Sales Associate Examination Content OutlineReal Estate Investment and Business BrokerageEasy
A real estate investor is considering a property that generated $75,000 in net operating income (NOI) last year. Similar properties in the area have sold with a capitalization rate of 7.5%. Using this information, what is the estimated value of the subject property?
- A$1,125,000
- B$900,000
- C$1,050,000
- D$1,000,000
Show answer & explanationAnswer & explanation
Correct answer: D. $1,000,000
The capitalization rate (cap rate) is used to estimate the value of income-producing properties. The formula is Value = Net Operating Income / Capitalization Rate. In this case, $75,000 / 0.075 = $1,000,000.
Why the other options are wrong
- A. This is incorrect. This might be a result of dividing NOI by a higher cap rate than given.
- B. This is incorrect. It might result from a calculation error or using a wrong cap rate.
- C. This is incorrect. This might be a result of multiplying NOI by a cap rate.
Capitalization Rate (Cap Rate)
A rate of return on a real estate investment property based on the income that the property is expected to generate, used to estimate the property's potential return.
- Calculated as Net Operating Income (NOI) / Property Value
- Used to compare potential returns of similar properties
- Lower cap rate generally indicates higher value for a given NOI
Memory trick: Income drives value, cap rate connects them.