Real Estate Math
What is the annual rate of return if a Minnesota investor purchases a rental property for $500,000 and earns a NOI of $35,000 per year?
A5%
B7%✓ Correct
C6%
D8%
Explanation
Cap rate (annual return) = NOI / Property Value = $35,000 / $500,000 = 0.07 = 7%. This is the capitalization rate, which represents the unlevered annual return on investment. Investors use cap rates to compare income properties in the Minneapolis-St. Paul metro and statewide.
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