To determine the capitalization rate (cap rate) of a building, we need to follow these steps:
1. Identify the Net Operating Income (NOI):
- The Net Operating Income (NOI) is the annual income generated from the property after deducting operating expenses. In this case, the NOI is given as $28,000.
2. Identify the Property Value:
- The property value is the market value or purchase price of the property. Here, the property value is given as $350,000.
3. Calculate the Capitalization Rate (Cap Rate):
- The capitalization rate is calculated by dividing the NOI by the property value and then converting this to a percentage.
The formula for the cap rate is:
[tex]\[
\text{Cap Rate} = \left( \frac{\text{NOI}}{\text{Property Value}} \right) \times 100
\][/tex]
4. Substitute the Given Values:
- Substitute the given NOI and property value into the formula.
[tex]\[
\text{Cap Rate} = \left( \frac{28,000}{350,000} \right) \times 100
\][/tex]
5. Simplify the Calculation:
- First, divide the NOI by the property value.
[tex]\[
\frac{28,000}{350,000} = 0.08
\][/tex]
- Then, multiply the result by 100 to convert it to a percentage.
[tex]\[
0.08 \times 100 = 8.0
\][/tex]
6. Interpret the Result:
- The capitalization rate for this building is 8.0%.
Thus, for a building that generates [tex]$28,000 of NOI and has a value of $[/tex]350,000, the cap rate is 8.0%.
