Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

How is the Capitalization Rate (Cap Rate) calculated?

1. Annual Revenue / Property Value

2. Annual NOI / Property Value

3. NOI / Total Debt

4. Property Value / Annual NOI

The correct answer is: Annual NOI / Property Value

The Capitalization Rate, often referred to as the Cap Rate, is an essential metric in real estate investment that helps assess the profitability of a property. It is a way to estimate the return on investment for a property based on its net operating income (NOI) and current market value. To calculate the Cap Rate, you take the annual net operating income (NOI) generated by the property and divide it by the property’s current market value. This calculation provides a percentage that represents the yield or rate of return on the investment, allowing investors to compare different properties and make informed decisions. The formula is thus: Cap Rate = Annual NOI / Property Value By focusing on the annual NOI, which accounts for the total income earned from the property after expenses are deducted, this method provides a clearer picture of the property's financial performance. In contrast, the other options do not represent the standard method for calculating the Cap Rate. For instance, dividing annual revenue by property value does not account for operating expenses, making it less accurate for assessing the true profitability of the investment. Similarly, NOI divided by total debt does not relate to the property's value and thus does not provide insight into how the property is performing relative to the market. Finally, property value divided