Problem 1

You have just purchased a small office building for $1,750,000. It has 5 tenants, who each pay $3,500 per month in rent. There is also miscellaneous income from vending machines, ATM, and rooftop antennas for a total of $5,000 annually. You estimate vacancy and collection loss of 10%. Operating Expenses are 35% of EGI. Capital expenditures are 5% of EGI and will be treated above the line.

Q1: What is your first year net operating income (NOI)?

Q2: What is your cap rate?

Explain how you determine both.

Problem 2

You own a small investment property and are considering selling it. Your property has NOI of $120,000. You have identified 4 comparable properties that all sold recently. All four offer essentially the same amenities and services as the subject. All were open-market transactions with similar terms of sale with 30-year fixed-rate mortgages using 70 percent debt and 30 percent equity. The sale prices and estimated first year net operating incomes were as follows:

Comp NOI Sale Price A $85,000 $1,416,667 B $92,000 $1,472,000 C $150,000 $2,142,857 D $110,000 $1,629,630

Q1: What is the indicated market value of your property? Explain how you determined this.