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Question:

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?

A $200,000.
Explaination

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.