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?

Answer 1

Answer:

The question is missing below options:

A.7.6%

B.8.9%

C.12.48%

D.22.05%

The correct option is C,12.48%

Explanation:

Note the difference between my 12.49% and the 12.48% is due rounding error.

The computation is shown below:

Annual property rent ($900*20*12)                      $216,000.00  

Less; provision for vacancy (5%* 216,000)           ($10,800.00)

Effective gross income                                           $205,200.00  

deduct:

maintenance  expenses                                         ($17,500.00)

Insurance                                                                ($7,200.00)

taxes                                                                   ($7,500.00)

Utilities                                                                     ($6,400.00)

management fee(10%*$205,200)                         ($20,520.00)

Net operating income                                             $146,080.00  

Property investment                                                $1,170,000.00

Investor's rate of return(net operating income/initial investment)

investor'r rate of return=$146,080/$1,170,000=12.49%