Question

An apartment building contains twenty units. Each unit rents for $900 per month. The vacancy rate is 5%. Annual expenses are $17,500 for maintenance, $7,200 insurance, $7,500 taxes, $6,400 utilities, $7,500 mortgage debt and 10% of the gross effective income for the management fee. What was the investor's rate of return for the property if she paid $1,170,000 for the property?
a. 7.6%
b. 8.9%
c. 12.46%
d. 22.05%

Answer 1

Answer: 12.48%

Explanation: Rate of Return (RoR) refers to the net profit or loss on an investment over a specified period expressed as a percentage of the investment's initial cost.

Number of apartment = 20

Monthly rental = $900

Vacancy rate = 5%

Annual expenses :

$17,500 - maintenance fee

$7,200 - Insurance

$7,500 - taxes

$6,400 - utilities

$7,500 - mortgage debt

10% of gross effective income- management fee

$1,170,000 - initial investment.

Gross income = 20*$900*12 = $216,000

Vacancy rate = 0.05*$216,000 = $10,800

Effective gross = gross income - Vacancy rate = $205,200

Management fee = 0.1 * $205,200 = $20,520

Total annual expenses = $20,520+$7,500+$7,200+$6,400+$17,500 = $59,120(excluding mortgage debt)

Net profit / loss = effective gross income - total annual expenses.

Net profit /loss = $205,200-$59,120 = $146,080.

RoR = Net profit/loss ÷ initial investment

RoR = ($146,080 ÷ $1,170,000) * 100

0.1248 * 100 = 12.48%