A property has an NOI of $195,000 Using a 7.5% Cap Rate what is the value...

A property has an NOI of $195,000

Using a 7.5% Cap Rate what is the value of the property?

Using an 8.5% Cap Rate would the value be lower or higher?

If the property is being offered at $2.8M what is the indicated Cap Rate?

Expert Solution

Answer:

Capitalization Rate =	Net Operating Income(NOI)
	Market Value of the Asset

Net Operating Income(NOI) =	$195000

Calculation of value of property using 7.5% Cap rate

Market Value of the Asset =	195000/7.5%

Value of property =	$2600,000


Calculation of value of property using 8.5% Cap rate

Market Value of the Asset =	195000/8.5%

Value of property* =	$22,94,117.65

*Higher Cap rate with existing NOI would give lower property value because now the same income is generated by investing less amount, the value in terms of percentage will increase.


Calculation of Cap rate at $2.8M property value


Capitalization Rate =	Net Operating Income(NOI)
	Market Value of the Asset

=	$195000
	$2800000

=	6.96%

**Since the value of the asset is more with same NOI, Cap Rate reduces.

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