Question

If an investor/manager believes she can increase the net operating income of a building then she would probably view the current cap rate on the building as low and a potentially good investment. While other investors might see the property as overvalued. True or False

The capitalization rate, “cap rate” measures the annual net operating income of a commercial property relative to its market value. True or False

You are searching for a commercial property to buy in Brooklyn. You have narrowed your search down to three properties. Property (1) has a cap rate of 7, property (2) has a cap rate of 8, and (property (3) has a cap rate of 6. Property (3) must be the better choice because the cap rate implies that property (3) has the highest net income of the three properties.

True or False

Answer 1

Answer: 1) If Net operating income goes up, then there is a possibility of increase in future capitalization rate as cap rate - NOVAsset value. So correct answer is TRUE 3) Cap Rate (Capitalization Rate)-Net Operating Income of the Property Asset Value of the property The above formula implies that higher is the cap rate, higher will be the net income. So the given statement is False. To understand this, suppose the asset value for all three properties are $100,000, so the Net Income for each property would be: Property 1-0.07 $100,000 $7,000 Property 2-0.08*$100,000 $8,000 Property 3 -0.06 $100,000 $6,000 So, we can see that Property 2 has the highestincome, so the statement is False