A practice property has $28,000 annual net operating income. Why does using an 8% capitalization rate produce a lower indicated value than using 7%, even though 8 is the larger number?
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In this direct-capitalization exercise, value equals annual NOI divided by the rate written as a decimal. The rate is the divisor, not a percentage being added to the property's price.
- At 7%: $28,000 / 0.07 = $400,000.
- At 8%: $28,000 / 0.08 = $350,000.
Holding the numerator unchanged, a larger divisor produces a smaller result. Check the second answer by multiplying $350,000 by 0.08; it returns the stated $28,000 income.
These are hypothetical study assumptions, not recommended Florida cap rates. Real income estimates and rates require evidence and must measure the same interest and income basis. See the NOI and cap-rate worksheet and the BOE explanation of capitalization formulas.
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