How is property value calculated using cap rate and net operating income?

The formula for calculating property value using the capitalization rate (cap rate) and net operating income (NOI) is based on the fundamental principles of real estate investment analysis. The correct answer states that the annual net operating income is divided by the cap rate to determine the property value.

In practice, the cap rate is expressed as a percentage and represents the expected rate of return on an investment property. To find the value of the property, one must understand that the cap rate essentially reflects the risk associated with the property and the market conditions at the time. By taking the annual net operating income, which is the income generated from the property after operating expenses are deducted, and dividing it by the cap rate, one can determine the property's market value. This relationship shows how much an investor is willing to pay per dollar of income generated, allowing for a clear estimation of property value based on its income-generating potential.

For example, if a property generates $100,000 in net operating income and the cap rate is 10%, the calculation would be $100,000 / 0.10 = $1,000,000, indicating that the property's market value is $1 million.

This method is fundamental in real estate evaluations and investment decisions, making it