A commercial property generates $120,000 in annual rental income with operating expenses of $35,000. If the property was purchased for $850,000, what is the capitalization rate?
Correct Answer
B) 10.0%
The capitalization rate is calculated as Net Operating Income (NOI) divided by purchase price. NOI = $120,000 - $35,000 = $85,000. Cap rate = $85,000 ÷ $850,000 = 0.10 or 10.0%.
Why This Is the Correct Answer
Option B (10.0%) is correct because it properly applies the capitalization rate formula. First, calculate Net Operating Income: $120,000 (rental income) - $35,000 (operating expenses) = $85,000 NOI. Then apply the cap rate formula: $85,000 ÷ $850,000 = 0.10 or 10.0%. This calculation follows standard commercial real estate valuation principles used across Canadian provinces and aligns with appraisal methodology requirements under provincial real estate legislation.
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