Real Estate Math
A Florida investor purchases a 20-unit apartment building for $1,800,000. Each unit rents for $800/month. The operating expense ratio is 40%. What is the cap rate?
A5.33%✓ Correct
B3.2%
C8%
D6.4%
Explanation
Annual PGI = 20 × $800 × 12 = $192,000. Assuming full occupancy (no vacancy stated): NOI = PGI × (1 − Operating Expense Ratio) = $192,000 × (1 − 0.
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Key Terms to Know
Capitalization Rate (Cap Rate)
A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Net Operating Income (NOI)The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
Math Concepts
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