If net operating income remains the same and the cap rate increases, what happens to value?

If net operating income remains the same and the cap rate increases, what happens to value?

• A. Value decreases.
• B. Value increases.
• C. Value remains unchanged.
• D. Cannot determine.

Answer: (A)

The value moves inversely with the capitalization rate when net operating income stays the same. Value is calculated as Value = NOI / Cap Rate. If NOI is unchanged and the cap rate increases, the denominator gets larger, so the resulting value falls. For example, if NOI is $100,000: - at a 5% cap rate, value = $100,000 / 0.05 = $2,000,000 - at a 6% cap rate, value = $100,000 / 0.06 ≈ $1,666,667 This demonstrates why value decreases when the cap rate rises. The cap rate reflects the return investors demand; higher required return means a lower price for the same income.

The value moves inversely with the capitalization rate when net operating income stays the same. Value is calculated as Value = NOI / Cap Rate. If NOI is unchanged and the cap rate increases, the denominator gets larger, so the resulting value falls.

For example, if NOI is $100,000:

• at a 5% cap rate, value = $100,000 / 0.05 = $2,000,000

• at a 6% cap rate, value = $100,000 / 0.06 ≈ $1,666,667

This demonstrates why value decreases when the cap rate rises. The cap rate reflects the return investors demand; higher required return means a lower price for the same income.