Property Valuation
A property manager is computing a capitalization rate for investment analysis. Which of the following correctly describes the capitalization rate?
AThe ratio of gross income to property value
BThe ratio of net operating income to property value, representing the rate of return on investment✓ Correct
CThe mortgage interest rate applied to property value
DThe property tax rate applied to assessed value
Explanation
The capitalization (cap) rate = NOI ÷ Property Value. It represents the rate of return an investor expects from the property based on the income it generates, independent of financing. A higher cap rate indicates higher risk or lower demand; a lower cap rate indicates lower risk or higher demand.
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