Question

An Income Approach Valuation

A 10 year old 75 unit apartment building recently sold for $2,000,000. If 100% occupied, total rent payments would equal $30,000 per month However, the building has a 15% vacancy loss. Annual Operating expenses are known to be 25% of Effective Gross Income.

Sale Prices and year 1 NOI data have been obtained from 4 other commercial properties in the area:

A high rise office building: Sold $3 million, NOI: $120,000

A half vacant shopping center: Sold 1 million, NOI: $90,000

A 7 Year old 60 unit Apartmnt Building: Sold 1,800,000, NOI: 90,000

A 12 year old 75 unit Apartment Building Sold 2,200,000, NOI: $110,000

Based on this information answer the following questions (show all your work):

A) What is the effective gross income of the subject property

B) What is the The potential gross income of the subject property:

C) What is The NOI of the subject property

D) What is the appropriate cap rate to use with the income approach for valuing the Subject Property

E) What is The estimate of value for the Subject Property

Answer 1

Rental income if fully occupied+any other income=Potential gross income

Potential gross income-vacancy losses=Effective gross income

Effective gross income-operating expenses=Net operating Income(NOI)

Rent per year if fully occupied=$30,000*12=$360,000

Other income=0

1.Therefore, Potential gross income=$360,000

15% of vacancy losses=$360,000*15%=$54,000

2.Effective gross income=Potential gross income-vacancy losses=$360,000-$54,000=$306,000

Operating expenses=25% of effective gross income=25%*$306,000=$76,500

3.Net Operating income=Effective gross income-operating expenses=$306,000-$76,500=$229,500

4. Cap rate=NOI/Value

The subject property's comparable asset is the 4th one given in the question. First two are commercial buildings and 3rd is littile small and new one compared to asset 4.

Cap rate=$110,000/$2200000=5%

5.Value=NOI/cap rate=$229,500/5%=4,590,000

Value of the property=$4,590,000