Answer:
the market value of the property would be $138,542.
Explanation:
To calculate the market value of the property , we need to divide the net operating income by the capitalization rate, in the question we have been given the capitalization rate but the operating income is not available to us. So with the help of given potential gross income we will calculate the effective gross income and then from it we will calculate the net operating income, lets see how to do step wise calculation -
POTENTIAL GROSS INCOME - $25,000
(-) VACANCY AND COLLECTION LOSSES = 5% X $25,000
= $1250
EFFECTIVE GROSS INCOME = $23,750
Now from this we will subtract the operating expenses to get net operating income -
EFFECTIVE GROSS INCOME = $23,750
(-) OPERATING EXPENSES = 30% X $23,750
= $7125
NET OPERATING INCOME = $16,625
Now for calculating market value putting these value sin the formula -
NET OPERATING INCOME / MARKET CAPITALIZATION RATE
= $16,625 / 12%
= $138,541.66
= $138,542 ( APPROXIMATELY )
