An eight-unit building rents each unit for $1,800 a month. Allow 3% of gross potential rent for vacancy and collection loss. Annual operating expenses are $52,000 and annual mortgage payments are $60,000. Using a 5.5% capitalization rate, what is the building's estimated value?
Correct Answer
C) About $2,102,000: NOI of $115,616 after vacancy and operating costs, capitalized at 5.5%
Gross potential rent is 8 × $1,800 × 12 = $172,800; less 3% vacancy ($5,184) gives $167,616; less $52,000 operating expenses gives NOI of $115,616. Mortgage payments are financing costs and are not deducted. $115,616 ÷ 0.055 ≈ $2,102,109, or about $2,102,000.
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