An investor is analysing a sixplex with a net operating income of $78,000 a year. Similar small apartment buildings have recently sold at a capitalization rate of 5.2%. Using direct capitalization, what is the indicated value of the sixplex?
Correct Answer
B) $1,500,000
Direct capitalization divides net operating income by the capitalization rate: $78,000 ÷ 0.052 = $1,500,000. Multiplying by the rate, rounding the rate to 5%, or misplacing the decimal gives the wrong figures.
Why This Is the Correct Answer
$78,000 divided by 0.052 equals $1,500,000.
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