Capitalization rate example

Suppose an investment property has a net operating income of $52,000 per year.  Other similar investment properties are selling at a rate of return of 8%.  What is the estimated value of this building?

  1.  $416,000
  2.  $300,000
  3.  $650,000
  4.  $350,000

The answer is C.

The rate of return is synonymous with capitalization rate.

Remember that value = net operating income/capitalization rate.

This means that the value of this building is = $52,000/.08 = $650,000