Florida Real Estate Broker ExaminationReal Estate CalculationsMedium
A landlord owns a commercial building with 15,000 square feet of rentable space. The annual net operating income (NOI) is $120,000. If comparable properties in the area have a capitalization rate of 8%, what is the estimated value of the landlord's building?
- A$1,875,000
- B$1,500,000
- C$960,000
- D$1,000,000
Show answer & explanationAnswer & explanation
Correct answer: B. $1,500,000
The formula for property value using the capitalization rate is: Value = Net Operating Income / Capitalization Rate. So, $120,000 / 0.08 = $1,500,000.
Why the other options are wrong
- A. This is incorrect; it might result from an incorrect calculation or misinterpretation of the formula.
- C. This is NOI multiplied by the cap rate, not divided.
- D. This is incorrect; it might result from an incorrect calculation or misinterpretation of the formula.
Capitalization Rate (Cap Rate)
The capitalization rate is the rate of return on a real estate investment property based on the income that the property is expected to generate.
- Used to estimate the value of income-producing properties.
- Formula: Value = NOI / Cap Rate.
- Helps investors compare potential returns on different properties.
Memory trick: NOI over Cap Rate, Value is Great!