What is the capitalization rate for a property selling for $2 million with an effective gross income of $450,000 and net income of $325,000?

What is the capitalization rate for a property selling for $2 million with an effective gross income of $450,000 and net income of $325,000?

• A. 14.25%
• B. 15.65%
• C. 16.25%
• D. 17.65%

Answer: (C)

To determine the capitalization rate, also known as the cap rate, for an investment property, you would use the formula: Cap Rate = Net Operating Income (NOI) / Current Market Value. In this case, the net income (which is often used interchangeably with net operating income) is given as $325,000, and the property value is $2 million. Using the formula: Cap Rate = $325,000 / $2,000,000. When you perform this calculation: Cap Rate = 0.1625 or 16.25%. This value represents the return on investment that an investor can expect from the property based on its net income and market value. A cap rate of 16.25% indicates that the property is relatively high-yielding compared to others in the market, which could attract investors looking for strong income-generating opportunities. The options reflect different cap rates, and by calculating it correctly, one arrives at the numerical conclusion that corresponds with the choice indicating 16.25% as the correct cap rate for the given property details.

To determine the capitalization rate, also known as the cap rate, for an investment property, you would use the formula:

Cap Rate = Net Operating Income (NOI) / Current Market Value.

In this case, the net income (which is often used interchangeably with net operating income) is given as $325,000, and the property value is $2 million.

Using the formula:

Cap Rate = $325,000 / $2,000,000.

When you perform this calculation:

Cap Rate = 0.1625 or 16.25%.

This value represents the return on investment that an investor can expect from the property based on its net income and market value. A cap rate of 16.25% indicates that the property is relatively high-yielding compared to others in the market, which could attract investors looking for strong income-generating opportunities.

The options reflect different cap rates, and by calculating it correctly, one arrives at the numerical conclusion that corresponds with the choice indicating 16.25% as the correct cap rate for the given property details.