19. You have a client who has an investment property valued at $400,000. Annual cap rates are 8%. What can your client expect in net operating income?
Answer: C
The expected net operating income is $32,000.
To determine the net operating income (NOI) from the investment property, the formula used is NOI = Property Value x Cap Rate. Given the property value of $400,000 and a cap rate of 8%, the calculation results in an expected NOI of $32,000.
A) $12,000
This option is incorrect. If the NOI were $12,000, the cap rate would be calculated as $12,000 / $400,000, which equals 3%. This does not align with the provided cap rate of 8%.
B) $22,000
This option is also incorrect. An NOI of $22,000 would imply a cap rate of $22,000 / $400,000, which equals 5.5%. This is significantly lower than the required cap rate of 8%.
C) $32,000
This option is correct. Calculating the NOI using the cap rate of 8% results in $32,000, derived from the equation $400,000 x 0.08 = $32,000. This accurately reflects the expected return based on the investment property's value and cap rate.
D) $42,000
This option is incorrect. If the NOI were $42,000, the cap rate would be calculated as $42,000 / $400,000, which equals 10.5%. This exceeds the given cap rate of 8%, making it an unrealistic expectation for this property.
Conclusion
The correct answer is $32,000, as this figure accurately reflects the expected net operating income based on the property's value and the specified cap rate. All other options either understate or overstate the income potential, demonstrating a miscalculation relative to the cap rate provided.