A California investor purchases an 8-unit apartment building in San Diego for $2,400,000. Each unit rents for $2,000/month. Operating expenses represent 40% of Effective Gross Income. The vacancy rate is 5%. What cap rate did the investor pay?
Correct Answer
D) 4.56%
Step 1: PGI = 8 × $2,000 × 12 = $192,000. Step 2: Vacancy = $192,000 × 5% = $9,600. Step 3: EGI = $192,000 - $9,600 = $182,400. Step 4: Operating Expenses = $182,400 × 40% = $72,960. Step 5: NOI = $182,400 - $72,960 = $109,440. Step 6: Cap Rate = $109,440 / $2,400,000 = 4.56%.
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When calculating Net Operating Income (NOI) for the income approach in California, all of the following are deducted as operating expenses EXCEPT:
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A California investor is comparing two rental properties. Property A has a cap rate of 6.5% and Property B has a cap rate of 4.0%. Assuming both properties are in California markets, what does the difference in cap rates generally indicate?