Real Estate Math
An apartment building with 20 units was purchased for $2,400,000. At $1,800/unit/month average rent and 93% occupancy, what is the cap rate?
AA. 8.4%
BB. 7.2%✓ Correct
CC. 9.1%
DD. 6.7%
Explanation
Annual potential gross income = 20 × $1,800 × 12 = $432,000. EGI = $432,000 × 93% = $401,760.
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Key Terms to Know
Net Operating Income (NOI)
The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
Debt-to-Income Ratio (DTI)A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.
Math Concepts
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