Assuming all other things are equal, which of the following properties is the best choice for an investor who wants to purchase income-producing property with the lowest level of risk? check a. Property #1: A capitalization rate of 10% with a property valued at $500,000. b. Property #2: A capitalization rate of 11% with a property valued at $500,000. c. Property #3: A capitalization rate of 12% with a property valued at $500,000. wrong d. Property #4: A capitalization rate of 13% with a property valued at $500,000.
Explanation: The capitalization rate of return (aka "cap rate") is the return on an investment that a property is producing or that an investor expects. For income-producing property, an investor will typically accept a lower rate of return on an investment with less risk. Note: You see this in personal loans too. A lender will usually offer a lower rate of interest to a "low-risk" borrower. A low-risk borrower is one who has, for example, a great FICO score, a high and steady income, and a solid employment history. Test-Taking Tip: Capitalization math involves three relationships: The value of the property, the capitalization rate of return, and the net operating income. You must know two
