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There is a 10 unit apartment complex in Bas Axe for sale. All have one BR,...

There is a 10 unit apartment complex in Bas Axe for sale. All have one BR, separate utilities, acreage to expand, monthly income is $3,900 and asking price is $175,000. Assume 10% vacancy, no capital reserve, and 40% fixed and variable expenses. What is capitalization rate? Why would this be attractive for investor?

Expert Solution

Step1: Computation of the net operating income for 10unit apartment. We have,

Monthly income for one unit apartment = $ 3,900

Number of unit = 10

Fixed & Variable expenses = 40% of monthly income.

Monthly income for 10 unit = 3,900 x 10 = $ 39,000

Vacancy = 10 %

Gross operating income = 39,000 - (39,000*10%) = 39,000 -3,900 = $ 35,100

Fixed and Variable expenses = 39,000 - (39,000*40%) = 39,000 - 15,600 = $ 23,400

Net Operating Income = Gross Operating Income - Fixed & Variable expenses

Net Operating Income = 35,100 - 23,400 = $ 11,700

Hence,the net operating income of 10 unit apartment complex is $ 11,700.

Step2: Computation of the capitalization rate. We have,

Capitalization rate = Net Operating Income / Current market value of the apartment

Capitalization rate = 11,700 / 175,000 = 0.0668*100 = 6.68 %

Hence, the capitalization rate is 6.68%

Lower capitalization rate mean investment has lower return while higher cap rate mean investment has higher return.Cap rate is also useful for helping investor to evaluate whether an investment is attractive relative to other and similar investments. That is why, Cap rate is attractive for investor.

jeff jeffy answered 2 years ago

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