Question

An apartment building has potential annual rents of $80,000. Expenses are $26,000. The current vacancy rate is 6%. The owner has a rate of return of 15%. What is the value of the building?

Answer 1

Answer:

The building is valued at $328,000 for the owner.

Explanation:

We calcualte the value of the building using the perpetuity formula:

C/r = Value

Where:

C = annual income generate for the building

expected rent revenue: revenue x (1 - vacancy)

80,000 x (1 - 0.06) =   75,200

expenses per year    (26,000)  

income per year:        49,200

rate of return 15% = 15/100 = 0.15

C/r = Value

49,200 / 0.15 = Value  = 328,000