A 4-unit building produces gross annual rent of $96,000 and net operating income of $61,000. It sold for $763,000. Which calculation correctly gives the property's capitalization rate, rounded to the nearest whole percent?
Correct Answer
D) The capitalisation rate is 8%: net operating income over the price
D. The capitalization rate rounds to 8%. Use annual NOI, not gross rent: $61,000 ÷ $763,000 × 100 = 7.9948%. Round only the final percentage to the requested whole percent. The separate annual gross-rent multiplier is $763,000 ÷ $96,000 = 7.9479. Scope and exceptions: The inputs are hypothetical question data. This does not establish an appropriate market capitalization rate. Source: Glossary: Capitalization; Gross Rent Multiplier — https://www.dre.ca.gov/files/pdf/refbook/ref27.pdf
Why This Is the Correct Answer
D. The capitalization rate rounds to 8%. Use annual NOI, not gross rent: $61,000 ÷ $763,000 × 100 = 7.9948%. Round only the final percentage to the requested whole percent. The separate annual gross-rent multiplier is $763,000 ÷ $96,000 = 7.9479. Scope and exceptions: The inputs are hypothetical question data. This does not establish an appropriate market capitalization rate.
Why the Other Options Are Wrong
Option A: The gross rent multiplier is 12.5, being the price over net income
Price divided by NOI is not the gross-rent multiplier.
Option B: The capitalisation rate is 12.6%: gross rent over the sale price
It substitutes gross rent for NOI.
Option C: The capitalisation rate is 8% and the multiplier 8, as both use net
Although rounding produces similar-looking numbers, the assertion that both measures use net income is wrong.
Exam Tip
Label numerator, denominator and units before calculating.
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