Question

Using the information provided, calculate the value of an apartment building using direct capitalization: Annual income = $150,000; Monthly Expenses = $2,000; Capitalization Rate = 9%

a. $1,134,000
b. $1,400,000
c. $1,644,444
d. $1,666,667

Answer 1

To find the apartment building value using direct capitalization, first calculate the annual expenses and subtract from the annual income to find the NOI. Then divide the NOI by the capitalization rate to get the property value. The calculated value is $1,400,000.

Step-by-step explanation:

To calculate the value of an apartment building using direct capitalization, one must first determine the Net Operating Income (NOI). The NOI is calculated by subtracting the annual expenses from the annual income.

First, convert the monthly expenses to an annual amount:

• Monthly Expenses = $2,000
• Annual Expenses = Monthly Expenses × 12 = $2,000 × 12 = $24,000

Next, subtract the Annual Expenses from the Annual Income to get the Net Operating Income (NOI):

• Annual Income = $150,000
• NOI = Annual Income - Annual Expenses = $150,000 - $24,000 = $126,000

Now, to find the value of the property using the capitalization rate, divide the NOI by the capitalization rate:

• Capitalization Rate = 9% or 0.09
• Value = NOI / Capitalization Rate = $126,000 / 0.09 = $1,400,000

The correct answer is b. $1,400,000.