Finance and Budget

Question 1

Capitalization Rate

Answer 1

Capitalization rate is the estimated percentage rate of return that a property will produce on the owner’s investment.
As a capitalization rate goes up, the valuation multiple of the asset goes down.
The capitalization rate is the ratio of Net Operating Income (NOI) to property asset value. So, for example, if a property was listed for $1,000,000 and generated an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%.

Question 2

Net Operating Income (NOI)

Answer 2

equals all revenue from the property minus all reasonably necessary operating expenses. Operating expenses are those required to run and maintain the building and its grounds, such as insurance, property management fees, utilities, property taxes, repairs and janitorial fees. It also excludes principal and interest payments on loans, capital expenditures, depreciation and amortization.