A property sold for $450,000 and generates annual net operating income of $27,000. What is the capitalization rate?
Correct Answer
B) 6.0%
The capitalization rate is calculated by dividing the net operating income by the sale price: $27,000 ÷ $450,000 = 0.06 or 6.0%. This rate represents the annual return on investment for the property.
Why This Is the Correct Answer
Option B is correct because the capitalization rate formula is Net Operating Income ÷ Property Value. Using the given values: $27,000 ÷ $450,000 = 0.06 = 6.0%. The cap rate represents the annual rate of return an investor can expect from the property based on its income-generating potential relative to its purchase price.
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