Property Valuation
Which factor would most likely increase the capitalization rate an investor requires for an income property?
AA prime location with low vacancy rates
BA long-term, creditworthy tenant on a net lease
CHigh perceived risk due to a declining neighborhood✓ Correct
DStable, predictable income with minimal management needs
Explanation
Cap rate reflects the risk-return relationship: higher perceived risk demands a higher cap rate (and thus lower price for the same income). A declining neighborhood increases investment risk, causing investors to demand a higher cap rate.
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