Property Valuation
A Hampton Roads investor evaluates two properties: Property A (NOI $50,000, value $625,000) and Property B (NOI $40,000, value $444,444). Which has the higher cap rate?
AProperty A (8%)
BProperty B (9%)✓ Correct
CThey are equal
DCannot be determined
Explanation
Property A cap rate = $50,000/$625,000 = 8%. Property B cap rate = $40,000/$444,444 = 9%.
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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.
Comparable Sales (Comps)Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.
Math Concepts
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