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

0.0471 or 4.71%.

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* 4=\$1480`

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

`\$1480* 12=\$17,760`

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

`\$17,760* (65)/(100)=\$17,760* 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}=(\$11,544)/(\$245,000)* 100\%`

`\text{Capitalization rate}=0.0471183673469388* 100\%`

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

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