Answer:
The calculation and explanation of this question is given below in explanation section.
Explanation:
Capitalization Rate (Cap Rate) is commonly used in real estate industry and it is refers to the rate of return on a property based on the net operating income (NOI) that the property generates. In other words, cap rate is a return metric that is used to determine the potential return on investment or payback of capital.
The formula for calculating cap rate is give below:
Cap rate: Net operating income / Current market value of asset
(in the above formula the symbol "/" is used for division)
So, we put the values given in question into formula accordingly.
Net operating income= $40,000
Current market value of asset=$200,000
So the cap rate is = ($40,000 / $200,000)=0.2
Therefore, If a property’s income value is $200,000 and it's earning a net operating income of $40,000, the cap rate is 0.2 or 2%.
