Ms. Kline estimates that a commercial building she is thinking of purchasing has gross potential income of $47,000 and a vacancy rate of 7%. She estimates that the operating costs are $25,000 per year and a nearby property with an NOI of $7,500 just sold for $65,000. What is the estimated value of this building?
A)$65,000
B)$162,153
C)$163,932
D)$165,393
E)$1,639,320

Question

Quizplus · Accepted Answer

First, calculate the effective gross income (EGI) by subtracting the vacancy losses from the gross potential income. With a 7% vacancy rate on a $47,000 gross potential income, the vacancy losses amount to $47,000 * 7% = $3,290. Therefore, the EGI is $47,000 - $3,290 = $43,710.Next, subtract the operating costs from the EGI to find the net operating income (NOI). With operating costs of $25,000, the NOI is $43,710 - $25,000 = $18,710.To find the estimated value of the building, use the capitalization rate (cap rate) from the nearby property. The cap rate is found by dividing the NOI of the nearby property by its sale price, which is $7,500 / $65,000 = 0.11538 or 11.538%.Finally, to find the estimated value of Ms. Kline's building, divide its NOI by the cap rate: $18,710 / 0.11538 = $162,153.

Ms Kline Estimates That a Commercial Building She Is Thinking