If the NOI remains unchanged and the cap rate falls, what happens to the property value?

• A. Decreases
• B. Remains the same
• C. Doubles
• D. Increases

Answer: (D)

Value is NOI divided by the cap rate, so Value = NOI / Cap Rate. If NOI stays the same and the cap rate falls, the denominator shrinks, causing the value to rise. Intuitively, a lower cap rate means a lower required return, so buyers will pay more for the same income stream. For example, with NOI of $100,000, dropping the cap rate from 8% to 6% raises value from $1,250,000 to about $1,666,667. So the property value increases.