What is the capitalization rate formula?

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Multiple Choice

What is the capitalization rate formula?

The capitalization rate shows how much annual net operating income a property generates relative to its price. It is defined as the ratio of net operating income to the property's value, so the direct formula is cap rate equals NOI divided by value. This makes intuitive sense: a higher NOI for the same price means a higher return, while a higher price with the same NOI lowers the cap rate. You can rearrange the formula to solve for other variables: NOI equals cap rate times value, or value equals NOI divided by cap rate. The other forms mix up the relationship by inverting the ratio, which changes what the number represents. Example: if NOI is $60,000 and value is $600,000, the cap rate is 0.10 (10%).

The capitalization rate shows how much annual net operating income a property generates relative to its price. It is defined as the ratio of net operating income to the property's value, so the direct formula is cap rate equals NOI divided by value. This makes intuitive sense: a higher NOI for the same price means a higher return, while a higher price with the same NOI lowers the cap rate. You can rearrange the formula to solve for other variables: NOI equals cap rate times value, or value equals NOI divided by cap rate. The other forms mix up the relationship by inverting the ratio, which changes what the number represents. Example: if NOI is $60,000 and value is $600,000, the cap rate is 0.10 (10%).

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