If Net Operating Income increases while property value stays the same, what happens to the capitalization rate?

If Net Operating Income increases while property value stays the same, what happens to the capitalization rate?

• A. It increases
• B. It decreases
• C. It remains the same
• D. It becomes negative

Answer: (A)

Cap rate is NOI divided by property value. If net operating income increases while the property value stays the same, the numerator grows while the denominator remains fixed, so the ratio rises. For example, NOI going from 80,000 to 100,000 on a property valued at 1,000,000 shifts the cap rate from 8% to 10%. Therefore, the capitalization rate increases.

Cap rate is NOI divided by property value. If net operating income increases while the property value stays the same, the numerator grows while the denominator remains fixed, so the ratio rises. For example, NOI going from 80,000 to 100,000 on a property valued at 1,000,000 shifts the cap rate from 8% to 10%. Therefore, the capitalization rate increases.