Property Management
A capitalization rate (cap rate) for an investment property is calculated as:
AGross income divided by purchase price
BNet operating income divided by market value✓ Correct
CCash flow divided by equity
DGross rent divided by expenses
Explanation
Cap rate = Net Operating Income (NOI) divided by market value (or purchase price). It measures the rate of return on an investment property independent of financing.
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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.
Option ContractA contract giving the buyer the right, but not the obligation, to purchase a property at a specified price within a specified time period.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
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