CFA Practice Question

CFA Practice Question

Using the following data and the direct capitalization approach, an analyst estimated the market value of an income-producing property to be $2,750,000:

Annual gross potential rental income $400,000
Annual property operating expenses $100,000
Annual vacancy and collection losses $50,000
Which of the following capitalization rates is closest to the rate the analyst used to calculate the market value of the property?
A. 9.1%
B. 10.8%
C. 11.6%
Explanation: Market capitalization rate = Annual NOI/market value

Gross potential rental income $400,000
Property operating expenses (100,000)
Vacancy and collection losses (50,000)
Net operating income $250,000
= $250,000 / $2,750,000
= 9.1%.

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