suppose that you are trying to extract a capitalization rate from the market. Yo

Question

suppose that you are trying to extract a capitalization rate from the market. You have obtained three comparable properties that have sold recently. Property #1 had a net operating income of $200,000 and sold for $1.6 million. Propery #2 had an NOI of $300,000 and sold for $2.1 million. Property #3 had an NOI of $400,000 and sold for $3.6 million. What is the market capitalization rate implied by these tranactions if you decide to weight all three comparables equally?

a. 12.6%

b. 12.2%

c. 11.1%

d. 7.9%

Explanation / Answer

Capitalization rate = net operating income/sale price

for property 1 = 200000/1,600,000 = .125

for property 2 = 300,000/2,100,000 = .1428

for property 3 = 400,000/3,600,000 = .1111

so weighing them equally means each carrying weight of 0.33

so

combined market cap rate = sum of product of weights and capitalization rate

= .33 * .125 + .33 *.1428 + .33*.1111 = .33 *(.3789) = .126 or 12.6%

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