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Question:
Kari is interested in purchasing a commercial property to hold as an income-generating investment. Kari locates a property that may be suitable. To quickly determine an estimate of the rate of return generated by the property, Kari divides the property’s net operating income (NOI) by the price she would offer to purchase the property. What does this calculation provide Kari?
A
The capitalization rate (cap rate).
explanation
The capitalization rate (cap rate) is the annual rate of return produced by the operations of an income property. The cap rate is calculated by dividing the net operating income (NOI) by the price asked or offered for the income property. The cap rate is used to estimate the annual rate of return on invested capital.
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