Property Valuation
The overall capitalization rate (OAR) for an income property reflects:
AThe mortgage interest rate
BThe ratio of NOI to total value, reflecting both equity and debt returns✓ Correct
CThe tenant's return on their investment in improvements
DThe local property tax rate
Explanation
The overall cap rate (OAR) = NOI ÷ Value. It reflects the total return on the property investment, blending both the equity investor's and lender's returns.
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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.
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.
Discount PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
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