California Real Estate Practice Exam

An investor purchased an income property at $200,000, with a capitalization rate of 10%. If the net income increased by 10% (with NO additional expense), and the "cap" rate increases to 12%, the new value of the property would be:

1. $183,333

2. $220,000

3. $265,000

4. $299,000

The correct answer is: $183,333

To determine the new value of the property after the changes in net income and capitalization rate, it is essential to understand how capitalization rate and property value relate to net income. Initially, the investor purchased the property for $200,000 with a capitalization rate of 10%. The capitalization rate is calculated as the net income divided by the property value: \[ \text{Cap Rate} = \frac{\text{Net Income}}{\text{Property Value}} \] From the initial conditions: \[ 10\% = \frac{\text{Net Income}}{200,000} \] This implies that the net income at the time of purchase was $20,000, calculated as: \[ \text{Net Income} = 0.10 \times 200,000 = 20,000 \] Now, with a 10% increase in net income, the new net income becomes: \[ \text{New Net Income} = 20,000 + (20,000 \times 0.10) = 20,000 + 2,000 = 22,000 \] Following this increase, the capitalization rate rises to 12%. Utilizing the formula for capitalization rate again to find the new property value: