QQuestionAccounting
QuestionAccounting
What is the cap rate if a building sells for $1,000,000 with an NOI of $120,000?
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Answer
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Step 1:I'll solve this real estate investment problem step by step using the cap rate formula.
Step 2:: Understand the Cap Rate Formula
\text{Cap Rate} = \frac{\text{Net Operating Income (NOI)}}{\text{Property Value}} \times 100\%
The capitalization rate (cap rate) is calculated by dividing the Net Operating Income (NOI) by the property's market value or purchase price.
Step 3:: Identify the Given Values
- Property Value = $1,000,000 - Net Operating Income (NOI) = $120,000
Step 4:: Calculate the Cap Rate
\text{Cap Rate} = 0.12 \times 100\% = 12\%
Step 5:: Interpret the Result
A 12% cap rate indicates the annual return on investment based on the property's current income relative to its market value.
Final Answer
The cap rate is 12%.
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