What is the value of a property that generates a net operating income of $36,000 with a cap rate of 4.5%?

To determine the value of a property using the net operating income (NOI) and the capitalization rate (cap rate), the formula used is:

Value = NOI / Cap Rate

In this scenario, the property generates a net operating income of $36,000, and the cap rate is given as 4.5%. To express the cap rate as a decimal, you divide it by 100, resulting in 0.045.

Using the formula:

Value = $36,000 / 0.045

When you perform the division, the calculation yields:

Value = $800,000

This result signifies that, based on the net operating income and the specified capitalization rate, the property is valued at $800,000. This method is widely used in real estate to assess property value, where the cap rate signifies the return expected on an investment. A lower cap rate generally indicates higher property values, as it reflects lower perceived risk and potentially higher quality of the income stream generated by the property.