Real Estate Appraisal Practice Exam

What is the term used to describe the expected rate of return on an investment?

1. Capitalization rate

2. Market value

3. Investment yield

4. Discount rate

The correct answer is: Capitalization rate

The capitalization rate is the term used to describe the expected rate of return on an investment, particularly in the context of real estate. It is calculated by taking the expected net operating income (NOI) of a property and dividing it by the current market value or acquisition cost of the property. This rate provides investors with a way to assess the potential profitability of an investment in relation to its cost. A higher capitalization rate indicates a potentially higher risk but also a higher expected return, while a lower rate may signify more stability and lower risk. Market value refers to the estimated price at which a property would sell in the current market, which may not directly reflect the expected rate of return. Investment yield is a broader term that could refer to various measures of return but doesn't specifically denote the rate of return in the context of real estate investments. The discount rate, while related to the time value of money and future cash flows, specifically applies to the present value calculations rather than serving as the direct expected rate of return on an investment.