Question

Ursula is considering the purchase of an apartment complex. Each of the 45 units in the complex currently rents for $700 per month. The vacancy rate is 8%, and laundry and parking gross income is estimated at $12,000 per year. Operating expenses are 25% of potential gross income, straight-line depreciation is $14,000 per year, and mortgage interest expense is estimated at $38,000 per year. Assuming the capitalization rate for this type of property is 9%, calculate the price that Ursula should pay for the complex.

Answer 1

Ursula will can pay up to: 2.420.221,33 dollars

Step-by-step explanation:

First we need to know the income from the apartment complex:

45 units x 700 dollars each x (1 - 8% vacancy): 28,980 dollars

laundry and parking income: 12,000 per year = 1,000 per month

Now, the expenses:

operating expenses: 25% of igross ncome:

( 28,980 + 1,000)x 25% = 7,495

depreciation: 14,000 per year: 1,166.67 per month

interest expense: 38,000 per year: 3,166.67 per month

operating income per month:

29.980 - 7.495 - 1,166.67 - 3,166.67 = 18.151,66‬

rate of return: 9% annual = 0.09 / 12 = 0.0075 per month

Finally we calcualte the PV:

present value of a monthly perpetuity of 18,151.66 dollars

18,151.66 / 0.0075 = $ 2.420.221,33