What is the capitalization rate for Tony’s rental house, purchased for $120,000 with a rent of $1,200 per month and annual operating costs of $1,800?

To determine the capitalization rate, also known as the cap rate, for Tony's rental house, you need to calculate the net operating income (NOI) and then divide that by the purchase price of the property.

First, calculate the annual rental income. Since the rent is $1,200 per month, you multiply this by 12 to find the total annual rental income:

Annual Rental Income = $1,200 * 12 = $14,400.

Next, subtract the annual operating costs from the annual rental income to find the net operating income:

Net Operating Income (NOI) = Annual Rental Income - Annual Operating Costs NOI = $14,400 - $1,800 = $12,600.

Now, to find the cap rate, divide the NOI by the purchase price of the property and multiply by 100 to convert it into a percentage:

Cap Rate = (NOI / Purchase Price) * 100 Cap Rate = ($12,600 / $120,000) * 100.

This calculation results in:

Cap Rate = 0.105 or 10.5%.

This indicates that a 10.5% return can be expected on the investment based on the net income generated from the property