The effective gross annual income from a property is 112,000. Total expenses for this year are 53,700. What capitalization rate was used to obtain a valuation of 542,325?

• A. 8%
• B. 10.75%
• C. 12%
• D. 9%

Answer: (B)

The key idea is that value in direct capitalization comes from dividing net operating income by the capitalization rate: Value = NOI / Cap rate. Net operating income is obtained by subtracting operating expenses from effective gross income.

Compute NOI: 112,000 − 53,700 = 58,300.

Now find the cap rate: 58,300 / 542,325 ≈ 0.1075, which is about 10.75%.

So, the capitalization rate used was approximately 10.75%.