Mr. Banks has asked you to estimate the value of an income-producing property that he estimates to have gross potential income of $393,000 and a vacancy rate of 10%. The operating costs are expected to be $193,000 per year. You have found that a similar property with an NOI of $55,000 recently sold for $375,000.
A)$160,700
B)$375,000
C)$1,095,682
D)$1,123,392
E)$1,883,277

Question

Quizplus · Accepted Answer

To calculate the estimated value of the property, we need to use the formula: 
Estimated Value = NOI / Cap Rate
Cap Rate = (NOI / Property Value) x 100%
We can calculate the NOI by subtracting the operating costs from the gross potential income: 
NOI = $393,000 x (1 - 0.10) - $193,000 = $196,700
We can use the recently sold property as a benchmark for the cap rate, since it is similar in nature: 
$55,000 = (0.1466 x Property Value) 
Property Value = $375,000 / 0.1466 
Property Value = $2,555,701
Using this cap rate (0.1466), we can calculate the estimated value: 
Estimated Value = $196,700 / 0.1466 = $1,340,819
Therefore, the best choice is C, $1,095,682, which is the closest to our estimated value.

Mr Banks Has Asked You to Estimate the Value of an Income-Producing