A) The capitalization rate, “cap rate” measures the annual net operating income of a commercial property relative to its market value. True or False
B) 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
1) Solution: True
Working: Capitalization Rate is computed as: Net Operating Income / Current Market Value
2) Solution: True
Explanation: A cap rate computes the net income which the property is expected to generate. Thus an investor prefers the high cap rate, indicating that the purchase price is relatively low in comparison to the net operating income
A) The capitalization rate, “cap rate” measures the annual net operating income of a commercial property...
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...
Property managers can do nothing to increase property cap rates since cap rates are determined by market forces. True or False The risk associated with a property’s net income will affect its cap rate. 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
An increased demand for commercial properties in a specific location should lower the cap rates for these properties. True or False If you were to use the average property cap rate for a neighborhood as the discount rate when trying to find the present value of a specific property’s net operating income, then properties in the neighborhood with higher net operating incomes would have lower valuations. True or False You should never buy an income producing property that has a...
An investor is trying to decide between two almost identical commercial properties, property A and property B. Property A has a cap rate of 10 and property B has a cap rate of 5. She must consider the possibility that the annual net operating income of property A is less certain or that the asking price for property B is too high or both. True or False If you were to use the average property cap rate for a neighborhood...
8. A property has Net Operating Income (NOI) of $130,000 and is offered for sale at $1,950,000. What Capitalization Rate did the seller use to price the property? Capitalization Rate: 130000/1950000=0.06667=6.67% 9. You have a Required Return of 7.66%. What would you offer for the property in the previous question?
In real estate net operating income (NOI) from a property is often divided by the cap rate to determine value. If we have a cash inflow (NOI) of $350,000 in year 1 and a cap rate of 6%, what is this stream of cash flows worth? Assume the cash flow continues each year to infinity. $1,800,342 $3,107,864 $5,833,333 $6,994,826 $8,478,243 Please help urgently.
#1 MULTIPLE CHOICE (no need to show work but please get right) 1. A property has a net operating income of $25,000 and the capitalization rate used in the market is 10%. What is the indicated value? a) $250,000 b) $300,000 c) $325,000 d) $2,500,000 2. A property sold for $555,000. The buyer anticipated that the potential gross income (PGI) would be $93,000, the vacancy would be 5%, and expenses would be 35% of the effective gross income (EGI) in...
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
Your investment rule is to only buy triple net lease properties that offer a positive NPV when the net operating income and sale of property is discounted back to the present at a 15% cost of capital. In other words, the discount rate you use in your calculations is 15%. Assume that you will pay the asking price. Your investment horizon is 15 years. At the end of 15 years you expect to sell the property for 30% more than...