Florida Real Estate Broker ExaminationReal Estate CalculationsMedium
An investor purchased a commercial property for $1,200,000. The property generates an annual net operating income (NOI) of $96,000. What is the capitalization rate (cap rate) for this property?
- A9.0%
- B8.0%
- C8.5%
- D7.5%
Show answer & explanationAnswer & explanation
Correct answer: B. 8.0%
The capitalization rate is calculated by dividing the Net Operating Income (NOI) by the property's value (purchase price). $96,000 / $1,200,000 = 0.08, or 8.0%.
Why the other options are wrong
- A. This would be incorrect if NOI was $108,000 (instead of $96,000).
- C. This would be incorrect if NOI was $102,000 (instead of $96,000).
- D. This would be incorrect if NOI was $90,000 (instead of $96,000).
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 potential return on investment.
- Calculated as Net Operating Income (NOI) divided by Property Value.
- Higher cap rates generally indicate higher risk or higher potential return.
Memory trick: NOI over Value, that's your Cap Rate view.