Mr Tyson is deciding whether to purchase an investment property that he estimates to have operating costs of $325,000 per year, gross potential income of $500,000, and a vacancy rate of 7

Finance Dec 24, 2020

Mr Tyson is deciding whether to purchase an investment property that he estimates to have operating costs of $325,000 per year, gross potential income of $500,000, and a vacancy rate of 7.5%. A similar property with an NOI of $122,000 recently sold for $1,000,000. What is the estimated value of this building?

Multiple Choice

$137,500
$325,000
$1,122,392
$1,125,343
$1,127,049

Expert Solution

Option e: $1,127,049

Gross Income (GI) = $500,000

Vacancy Rate (VR) = 7.5%

Expected Income = GI (1 –VR)

= 500,000 (1-0.075)

= $462,500

Operating Expenses = $325,000

Expected NOI = 462,500 – 325,000

= $137,500

NOI of similar Property = $122,000

Value of similar property = $1,000,000

Value of building = (137,500 / 122,000) *1,000,000

= $1,127,049

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