A commercial property sells for $319,200. What would be an appropriate cap rate to use when evaluating a similar property if its effective gross income is $70,000 and operating expenses are $32,000?

To evaluate an appropriate cap rate for the similar property, it's crucial to first determine the net operating income (NOI). The NOI is calculated by taking the effective gross income and subtracting the operating expenses.

In this scenario, the effective gross income is $70,000, and the operating expenses amount to $32,000. Therefore, the calculation for the NOI would be:

NOI = Effective Gross Income - Operating Expenses NOI = $70,000 - $32,000 NOI = $38,000

Once the NOI is determined, the cap rate can be calculated by dividing the NOI by the property’s value (in this case, the selling price of the similar property). The calculation for the cap rate is as follows:

Cap Rate = NOI / Property Value Cap Rate = $38,000 / $319,200 Cap Rate ≈ 0.119 or 11.9%

This indicates that if the similar property generates a net operating income of $38,000 against a purchase price of $319,200, the cap rate would indeed be approximately 11.9%. A cap rate of this nature suggests a higher return on investment compared to properties with lower cap rates, which could influence investment decisions