Question

1. From the following building pro forma calculate the: All Risks yield (ARY)/ the Cash on Cash Return / Capitalization Rate (Cap rate)

Purchase Price	$     16,550,000
Loan Amount	$   13,240,000
Initial Equity	$     3,310,000
Potential Rental Income	$    2,184,000
Vacancy & Credit Loss	9.00%
Effective Rental Income	$    1,987,440
Other Income	$                -
Gross Operating Income	$    1,987,440
Property Taxes	$       146,500
Insurance	$         15,000
Maintenance	$         90,000
Management Fee	$       262,080
Reserves for Replacement	$         35,000
Other expenses	$       122,000
Total Expenses	$       670,580
Net Operating Income	$    1,316,860
Debt Service	$       794,400
Cash Flow Before Tax	$       522,460

Answer 1

A) All risks yield (ARY)

All risks yield (ARY) = (Annual rental income / value of the property) * 1000

                                   = (1987440 / 16550000) * 100

                                   = 12 %

B) Cash on cash return

Cash on cash return = (annual before tax cash flow / total cash invested) *100

                                    = (522460 / 16550000) *100

                                    = 3.15 %

C) Capitalization rate

Capitalization rate = (net operating income / property cost) * 100

                                 = (1316860 / 16550000) * 100

                                  = 7.95 %