CFA Practice Question
A small office building that recently sold for $175,000 generates annual net operating income of $27,500. Using a 12% capitalization rate, how much NOI should a property generate under the income approach if the market value of the building is $195,000?
A. $23,400
B. $26,400
C. $171,600
Explanation: Under the income approach, assuming a capitalization rate of 12%, a building with a market value of $195,000 should generate NOI of: NOI = MV x k = $195,000 x .12 = $23,400.
User Contributed Comments 4
| User | Comment |
|---|---|
| samco | Don't be tricked by the first part of the question. |
| copus | The first part of the question is COMPLETELY irrelevant! |
| Mikehuynh | That how the question may trap us. |
| shumwaya | think of the Cap Rate as the % of the total investment (price of bldg) you receive in the first year of ownership. so you receive 12% of your total investment (195,000) back in the 1st year aka 195,000*.12 = 23,400 |