Question

Please do not use excel or copy

Estimate the present market value of a 10-unit apartment house given the following information pertaining to the property.

Each apartment has 1000 square feet of living area, 3 bedrooms, and kitchen appliances. Tenants pay their own utilities. The value of the land is $250,000. The estimate replacement value is $100 per square foot for this type of construction. Total operating expenses insurance and property taxes for the year, $25,000. The rental income, $6000 month/allow 5% for vacancy and non-payment. Management fees are 6% of total rents collected. The building is 20 years old and has an estimate future useful life of 20 more years. A first mortgage is available at 6% for 75% of the purchase price. Equity will be used as the other 25% of the purchase price and the owner requires a return of 12% on the equity investment.

Compute the following:

A) Net income before capitalization

B) Capitalization rate adjusted for recapture

C) Estimated value of this property using the income approach

D) Estimated value using the replacement cost approach

Show all work.

Answer 1

A) Net Income before Capitalisation:

1. Rental INcome : @ $6000/Month for 10 Apartments for 1 year : $ 7,20,000

less vacancy allowance $36000

Balance: $6,84,000

less operating expenses - $25000

management fees 6% rent collected : $41040

Net Income: $617960 (A)

B) Capitalization rate adjusted for recapture

Mortgage Loan is available @6% for 75% price which works out to 4.5 % of the total investment.

income expected by the invester on his 25% equity is 12% which works out to be 3%. Therefore Total capitalisation can be at rate above 7.5%

C) Estimated value of this property using the income approach

for calculating capitalised value under income approach generally discounted cashflow method is abopted.

that is the present value of the future earnings shall be calculated. for this purpose discounting factor is to be known. In the question there is no discounting factor. So the same cannot be answered with provided data.

D) Estimated value using the replacement cost approach

The replacement cost given is $100/SQFT so each apartment may worth $100,000.

total cost of 10 apartment will be therefore $1,000,000. Adding land value of Rs. $250,000, total replacement cost will be $1,250,000