Property Valuation
A Minnesota appraisal uses an overall cap rate of 7.5% to value a property with $55,000 NOI. A second property in the same area has the same NOI but a cap rate of 9%. The second property's value is:
AThe same since the NOI is the same
BLower since a higher cap rate means investors require more return and pay less✓ Correct
CHigher since a higher cap rate indicates better investment quality
DIndeterminate without additional information
Explanation
Property 1 value = $55,000 / 0.075 = $733,333. Property 2 value = $55,000 / 0.09 = $611,111. A higher cap rate means investors require a higher return (due to higher risk or less desirability), resulting in lower prices for the same income. The second property, with its higher cap rate, has lower value despite the same NOI. This inverse relationship between cap rates and values is fundamental to real estate valuation.
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