An investment property with 10 residential units rents for $2,000 per unit per month. The rate of vacancy and collection loss is 5%. Annual expenses are $10,200. Depreciation is 3%, and the interest paid on the trust deed is 12%. If the investor wants a 12% rate of return, what is the most she should pay?
Business · High School · Tue Nov 03 2020
Answered on
Given:
Gross Income per month = $2,000 per unit
Vacancy and Collection Loss rate = 5%
Annual Expenses = $10,200
Calculate the Gross Income per year:
Gross Income per year = Gross Income per unit per month * Number of units * 12 months
Gross Income per year = $2,000 * 10 units * 12 months = $240,000
Calculate Vacancy and Collection Loss:
Vacancy and Collection Loss = Gross Income per year * Vacancy and Collection Loss rate
Vacancy and Collection Loss = $240,000 * 5% = $12,000
Calculate NOI:
NOI = Gross Income per year - Vacancy and Collection Loss - Annual Expenses
NOI = $240,000 - $12,000 - $10,200 = $217,800
Given:
Depreciation = 3%
Interest Rate = 12%
Desired Rate of Return (Cap Rate) = 12%
Calculate the Total Annual Depreciation:
Total Annual Depreciation = Property Value * Depreciation Rate
Total Annual Depreciation = $217,800 * 3% = $6,534
Calculate the Net Operating Income After Depreciation (NOIAD):
NOIAD = NOI - Total Annual Depreciation
NOIAD = $217,800 - $6,534 = $211,266
Property Value = $211,266 / 0.12 (12% desired rate of return) = $1,760,550
Therefore, based on the given information and a desired 12% rate of return, the maximum price the investor should pay for the property is approximately $1,760,550.