Question

An investment property with 10 residential units rents for $2,000 per unit per month. The rate of vacancy and collection loss is 5%. Annual expenses are $10,200. Depreciation is 3%, and the interest paid on the trust deed is 12%. If the investor wants a 12% rate of return, what is the most she should pay?

Answer 1

Answer:

$1,815,000

Explanation:

First we must determine the gross income = $2,000 x 10 units x 12 months = $240,000

minus the vacancy rate = $240,000 x 5% = $12,000

minus the annual expense = $10,200

net income = $240,000 - $12,000 - $10,200 = $217,800

to calculate the maximum amount that the investor should pay we must divide the net income by the expected rate of return = $217,800 / 12% = $1,815,000

When you are calculating a project's price (buying this asset is an investment project), depreciation and debt service are not included in the calculations.