Cap rate is commonly computed as which formula?

Cap rate is commonly computed as which formula?

• A. Cap Rate = Property Value / NOI
• B. Cap Rate = NOI / Purchase Price
• C. Cap Rate = NOI / Property Value
• D. Cap Rate = NOI / Appraised Value

Answer: (C)

Cap rate measures the annual return a property would generate relative to its value, ignoring financing and taxes. It’s calculated by comparing what the property earns each year in net operating income to how much the property is worth. Specifically, cap rate equals net operating income (NOI) divided by the property's value. NOI represents all operating income minus operating expenses, before debt service and taxes, so the ratio reflects the unleveraged return on the property itself. This makes cap rate a handy, quick tool for comparing different income properties. If you flip the ratio to value divided by NOI, you’d be getting a measure that isn’t a return percentage, and using a purchase price can be inconsistent with current market value. Appraised value isn’t the standard input for this metric. So the correct approach is NOI divided by the property value.

Cap rate measures the annual return a property would generate relative to its value, ignoring financing and taxes. It’s calculated by comparing what the property earns each year in net operating income to how much the property is worth. Specifically, cap rate equals net operating income (NOI) divided by the property's value. NOI represents all operating income minus operating expenses, before debt service and taxes, so the ratio reflects the unleveraged return on the property itself. This makes cap rate a handy, quick tool for comparing different income properties.

If you flip the ratio to value divided by NOI, you’d be getting a measure that isn’t a return percentage, and using a purchase price can be inconsistent with current market value. Appraised value isn’t the standard input for this metric. So the correct approach is NOI divided by the property value.