If NOI is $50,000 and property value is $500,000, what is the cap rate?

• A. 5%
• B. 10%
• C. 15%
• D. 20%

Answer: (B)

Cap rate is a measure of return on a property, calculated by dividing net operating income by the property’s value. Here, NOI is 50,000 and the value is 500,000, so the cap rate is 50,000 divided by 500,000, which equals 0.10 or 10 percent. This means the property’s NOI represents 10 percent of its value.

To see why the other percentages don’t fit: a 5% cap rate would require NOI of 25,000; a 15% cap rate would require 75,000; and a 20% cap rate would require 100,000. Since the given NOI and value yield 10 percent, that is the correct cap rate.