Final answer:
In real estate investment, the capitalization rate 'R' in the formula (V = I/R) is the ratio of a property's net operating income to its value, which helps to determine the property's value based on its income. It is similar to the actual rate of return, which includes all capital gains and interest earned on an investment. The answer is option A.
Step-by-step explanation:
In the income approach formula (V = I/R), the 'R' represents the capitalization rate. The correct definition of a capitalization rate is option a: The ratio of one year's net operating income provided by an asset to the value of the asset. This means the capitalization rate is used to estimate the value of an income-producing property by taking the net operating income (NOI) the property generates and dividing it by the capitalization rate.
The actual rate of return is the total rate of return, including capital gains and interest paid on an investment at the end of a period. An example of a simple rate of return is the interest rate. If you deposit money into a savings account, you earn interest on that deposit. Conversely, if you take a loan, the interest you pay is the rate of return for the lender. In real estate, the capitalization rate somewhat resembles the actual rate of return on the investment.