Question

A building is valued at $215,000 and contains four apartments that rent for $470 each per month. The owner estimates that the net operating income is 65% of the gross rental receipts. What is the capitalization rate?

Answer 1

Answer:

Capitalization rate is 3.67%

Explanation:

The capitalization rate is the rate of return expected from a commercial property. In order to find the capitalization rate we divide the net operating income of the building by its current value. The value of the building is 215,000. The revenue from the building is 22,560 (470*4*12), We get this by multiplying the monthly rent of each apartment by 4 as their are 4 apartments and then multiplying that by 12 as we need the yearly revenue. The costs are 65% of gross rental receipts so costs = 0.65*22,560= 14,664

The annual operating income is 22,560-14,664= 7,896

The capitalization rate is annual operating income/Current value of property so

7,896/215,000= 3.67%