Question

Harry is looking at buying a building that has a monthly income of $3,600, a 5% vacancy rate, and annual expenses of $8,640. he is expecting a 12% return on his investment. how much should he pay for this building?

Answer 1

Answer:

He should pay = $270,000

Explanation:

The amount he should pay for the investment is the present value of he net income discounted at the rate of return of 12%

The occupancy rate = 100 -5= 95%

The net income = occupancy rate × income - expenses

                              = 95%× 3,600× 12 - 8,640= 32400

If we assume that the income is earned forever, then the Present value of the income will be

PV of net income = A/r

A-32400 , r -12%

                            = 32400/0.12

                             =$270000

He should pay = $270,000