Question

A building valued at $245,000 contains four apartments that each rent for $370 per month. The owner estimates that net operating income is 65% of gross rentals. What is the capitalization rate?

Answer 1

Answer:

0.0471 or 4.71%.

Step-by-step explanation:

We have been given that a building valued at $245,000 contains four apartments that each rent for $370 per month.

Let us find monthly income from 4 apartments by multiplying 370 by 4 as:

$\ 370\times 4=\ 1480$

Let us find annual gross income by multiplying monthly income by 12:

$\ 1480\times 12=\ 17,760$

Now, we will find net operating income by finding 65% of gross annual rentals as:

$\ 17,760\times \frac{65}{100}=\ 17,760\times 0.65=\ 11,544$

We know that the capitalization rate is the ratio between the net income of the property and its original price or capital cost.

So, we can find capitalization rate by dividing $11,544 by $245,000.

$\text{Capitalization rate}=\frac{\ 11,544}{\ 245,000}\times 100\%$

$\text{Capitalization rate}=0.0471183673469388\times 100\%$

$\text{Capitalization rate}=4.71183673469388\%\approx 4.71\%$

Therefore, the capitalization rate is approximately 0.0471 or 4.71%.