Question

An apartment building produces $4,000 per quarter in gross rents. The maintenance expenses run $350 per month. Property taxes are $1,750 per year. The mortgage payments are $650 per month. If the building is worth $83,750 what is the cap rate?

Answer 1

Answer:

0.16%

Step-by-step explanation:

Cost of rent per quarter = $4000

Cost of rent per year = 4×$4000

= $16,000

This means that the apartment building produces $12,000 per year in gross rents.

Yearly Expenses are as follows;

Maintenance expenses per year = 12×$350 = $4200

Property taxes per year = $1,750

Mortgage payment per year = 12×$650 = $7800

Total expenses per year = sum of all the yearly expenses

= $4200+$1,750+$7800

= $13750

Yearly revenue generated = Cost of rent per year - total yearly expenses

= $16,000-$13750

= $2250 (net operating income)

Capitalization rate is given as the ratio of the net operating income to the market value of the building.

Capitalization rate = net operating income/market value of building

Since the building with $83750, that will be its market value

Cap rate = $13750/$83750

Cap rate = 0.16%