1. You are considering the purchase of an office building for $1.5 million today. Your expectations include the following: first-year potential gross income of $340,000; vacancy and collection losses equal to 15% of potential gross income; operating expenses equal to 40% of effective gross income; and capital expenditures equal to 5% of effective gross income.

a. What is the estimated effective gross income for the first year of operations?

b. What is estimated net operating income for the first year of operations?

c. What is the estimated going-in cap rate (r) for the first year of operations?

2. An investment opportunity having a market price of $1,000,000 is available. You could obtain a $750,000, 25-year mortgage loan requiring equal monthly payments with interest rate of 7%. The following operating results are expected during the first year:

EGI $200,000

Operating Expenses and CAPEX$100,000

Net Operating Income$100,000

For the first year only

1. Gross income multiplier
2. Operating expense ratio, ratio of operating expenses to effective gross income
3. Monthly mortgage payment and total annual debt service
4. Debt coverage ratio (see last slide in chapter 16)
5. Overall capitalization rate