Texas Crammer Practice Exam

If an investor offers $120,000 for a property listed at $150,000 with a monthly income of $1,000, what analysis might they be using?

1. Gross income multiplier

2. Average return on investment

3. Capitalization rate

4. Expense ratio

The correct answer is: Capitalization rate

The analysis likely being used is the capitalization rate, which is a common method in real estate investment to evaluate the potential return on an investment property. In this scenario, the investor is offering $120,000 for a property that generates a monthly income of $1,000. To understand the value of the property in relation to its income, the investor might calculate the capitalization rate, which is found by taking the property's annual net operating income and dividing it by the purchase price. The capitalization rate provides insight into the expected rate of return based on the investment and can help investors compare similar properties. The annual income in this case is $1,000 multiplied by 12 months, resulting in $12,000. Therefore, using the investor's offered price of $120,000, the capitalization rate would be calculated as follows: \[ \text{Capitalization Rate} = \frac{\text{Annual Income}}{\text{Price}} = \frac{12,000}{120,000} = 0.10 \text{ or } 10\% \] This information helps the investor assess whether the $120,000 offer reflects a reasonable return compared to other investment opportunities or properties in the market.