What is the rate of capitalization (R)?

• A. The percentage used for the rate of return that an investor obtains or desires by owning the property
• B. The annual net income
• C. The percentage of the sales price paid as commission
• D. The selling price

Answer: (A)

Capitalization rate expresses the return an investor expects from a property based on its income relative to its price. It’s a percentage calculated by dividing net operating income by the property's value (or purchase price). This tells you, in percentage terms, what level of return the property’s income supports given how much you paid for it. So the rate of capitalization is the percentage used to represent the investor’s desired or expected return on owning the property.

For example, if a property has a net operating income of $50,000 and is valued at $500,000, the capitalization rate is 50,000 / 500,000 = 0.10, or 10%. This rate helps compare properties and estimate value: Value = NOI / cap rate (so a higher cap rate implies a lower price for the same NOI, and vice versa). The other options describe a dollar amount of income, a commission percentage, and the selling price, none of which convey the concept of a rate of return relative to value.