Real Estate Math
A Rhode Island building has an NOI of $50,000 and is purchased for $625,000. An investor needs a 9% return to justify the investment. Is this a good investment?
AYes, because the cap rate (8%) is within acceptable range
BNo, because the cap rate (8%) is below the required 9% return✓ Correct
CYes, because any positive return is acceptable
DNo, because the building is overpriced by $50,000
Explanation
Cap rate = NOI / Price = $50,000 / $625,000 = 8%. Since 8% is below the investor's required 9% return, this investment does not meet the investor's criteria.
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