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13 October, 02:02

If a property's income value is $200,000 and it's earning a net operating income of $40,000, what is the cap rate?

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  1. 13 October, 02:33
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    The calculation and explanation of this question is given below in explanation section.

    Explanation:

    Capitalization Rate (Cap Rate) is commonly used in real estate industry and it is refers to the rate of return on a property based on the net operating income (NOI) that the property generates. In other words, cap rate is a return metric that is used to determine the potential return on investment or payback of capital.

    The formula for calculating cap rate is give below:

    Cap rate: Net operating income / Current market value of asset

    (in the above formula the symbol "/" is used for division)

    So, we put the values given in question into formula accordingly.

    Net operating income = $40,000

    Current market value of asset=$200,000

    So the cap rate is = ($40,000 / $200,000) = 0.2

    Therefore, If a property's income value is $200,000 and it's earning a net operating income of $40,000, the cap rate is 0.2 or 2%.
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