An apartment building produces an annual net operating income (NOI) of $24,000. A buyer seeks an annual rate of return of 12%. What price does the buyer pay for the property?

The capitalization method requires knowing the net operating income (NOI) and the appropriate cap rate. First, place the two numbers provided in the question into the cap rate formula.
$24,000 (NOI) = 12% (cap rate) x P (price)
Next, divide the NOI by the cap rate.
$24,000 / 0.12 = P
P = $200,000
Thus, the buyer is to pay no more than $200,000 to yield a 12% rate of return.