If a property has a net operating income of $60,000 and sells for $750,000, what is the capitalization rate?
Question & Answer
Review the question and all answer choices
6%
A is incorrect because it represents a calculation error. $60,000 ÷ $750,000 equals 0.08 or 8%, not 0.06 or 6%. This mistake often occurs when students miscalculate the division or incorrectly convert the decimal to a percentage.
8%
10%
C is incorrect because it inverts the calculation, using sale price divided by NOI ($750,000 ÷ $60,000 = 12.5). This mistake happens when students confuse cap rate with other metrics like the property price multiple or gross rent multiplier.
12.5%
D is incorrect because it represents the result of inverting the formula (sale price divided by NOI). The correct calculation is NOI divided by sale price, which gives 8%, not 12.5%.
Why is this correct?
B is correct because the capitalization rate formula is NOI divided by sale price. $60,000 ÷ $750,000 = 0.08, which equals 8%. This represents the rate of return an investor would receive on the property based on its net income relative to its purchase price.
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