You have a client who has an investment property valued at $400,000. Annual cap rates are 8%. What can your client expect in net operating income?

Rationale

Your client can expect a net operating income of $32,000.

To calculate the net operating income (NOI), multiply the property value by the cap rate: $400,000 × 0.08 = $32,000. This figure represents the expected income generated from the property before accounting for expenses.

A ($12,000) YOUR ANSWER

This amount is derived from a calculation that incorrectly applies the cap rate to a smaller base or an incorrect percentage. Specifically, $12,000 represents 3% of $400,000, which does not reflect the stated cap rate of 8%. Therefore, it does not accurately represent the net operating income for this investment property.

B ($22,000) YOUR ANSWER

The figure of $22,000 may result from miscalculating the cap rate or using an incorrect annual percentage. When applying an 8% cap rate to a $400,000 property, the expected NOI should be $32,000, demonstrating that $22,000 significantly underestimates the potential income generated from the investment.

C ($32,000) CORRECT

This value is correctly calculated by taking 8% of the property's value of $400,000. The formula applied here is correct: $400,000 × 0.08 = $32,000, which accurately reflects the annual net operating income expected from the investment property.

D ($42,000) YOUR ANSWER

This amount suggests a cap rate of 10.5% being applied to the property, calculated as $42,000 divided by $400,000. However, with an established cap rate of 8%, this figure is not feasible, as it exceeds the expected NOI for the property based on the given valuation.

Conclusion

The net operating income of an investment property is determined by multiplying its value by the cap rate. In this case, a property valued at $400,000 with an 8% cap rate generates an NOI of $32,000, which accurately reflects its income potential. Other options either miscalculate the cap rate or mistakenly apply incorrect figures, underscoring the importance of precise calculations in real estate investments.

You have a client who has an investment property valued at $400,000. Annual cap rates are 8%. What can your client expect in net operating income?

Your client can expect a net operating income of $32,000.

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