Florida Real Estate Broker ExaminationReal Estate Finance and InvestmentMedium
A Florida investor is purchasing an apartment complex for $5,000,000. The property generates an annual Net Operating Income (NOI) of $400,000. What is the capitalization rate (cap rate) for this investment?
- A25%
- B20%
- C12.5%
- D8%
Show answer & explanationAnswer & explanation
Correct answer: D. 8%
The capitalization rate (cap rate) is calculated by dividing the Net Operating Income (NOI) by the property's purchase price. In this case, $400,000 / $5,000,000 = 0.08 or 8%.
Why the other options are wrong
- A. This is an incorrect calculation, possibly dividing $1,250,000 by $5,000,000.
- B. This is an incorrect calculation, possibly dividing $1,000,000 by $5,000,000.
- C. This is the reciprocal of the cap rate, often called the NOI multiple ($5,000,000 / $400,000 = 12.5).
Capitalization Rate (Cap Rate)
A rate of return on a real estate investment property based on the expected income that the property will generate.
- Calculated as Net Operating Income (NOI) / Property Value.
- Expressed as a percentage.
- Used to estimate an investor's potential return and compare similar properties.
Memory trick: Cap Rate: NOI over Value, for your investment's true view.