California Real Estate Practice Exam

Which percentage represents a reasonable cap rate for attributing income?

1. 9%

2. 8%

3. 7%

4. 10%

The correct answer is: 9%

A cap rate, or capitalization rate, is a key metric in real estate investment that helps investors understand the expected return on an investment property based on its income-generating potential. It is calculated by dividing the net operating income (NOI) of a property by its purchase price or current market value. The percentage that represents a reasonable cap rate varies depending on several factors, including the type of property, its location, the current market conditions, and the level of perceived risk associated with the investment. A cap rate in the range of 9% is often viewed as attractive for real estate investors, indicating a higher return relative to the risks involved. In general, higher cap rates are associated with higher levels of risk and, therefore, can often be found in less desirable locations or in properties requiring significant management and upkeep. Conversely, lower cap rates are typically seen in more stable and sought-after areas, reflecting lower risk and potentially slower income growth. A cap rate of 9% suggests a balance between risk and reward that many investors might find appealing, especially in more volatile markets. While 8%, 7%, and 10% may also be reasonable in different contexts, the 9% cap rate stands out as a midpoint in many markets, suggesting