Property Valuation
A capitalization rate (cap rate) in income property analysis represents:
AThe percentage of gross rent a property keeps after vacancy
BThe rate of return an investor expects on the current value of the property✓ Correct
CThe annual interest rate charged on a commercial mortgage
DThe ratio of NOI to total expenses
Explanation
The cap rate is the ratio of NOI to property value, representing the unleveraged return on investment. Higher cap rates indicate higher returns (and often higher risk or lower desirability markets).
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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.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
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.
Math Concepts
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