Real Estate Math
A Hawaii investment property generates $110,000 NOI. Using a 5.5% cap rate, what is the value?
AA. $1,800,000
BB. $2,000,000✓ Correct
CC. $1,900,000
DD. $2,100,000
Explanation
Value = $110,000 / 0.055 = $2,000,000.
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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.
AmortizationThe gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
Adjustable-Rate Mortgage (ARM)A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.
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