Final answer:
To determine the value of the apartment complex, the Potential Gross Income (PGI) is calculated and adjusted for vacancy and collection losses and operating expenses to determine the Net Operating Income (NOI). Using a capitalization rate of 10%, the value of the property is calculated to be $407,250. The investor should consider paying this amount for the apartment complex.
Step-by-step explanation:
An investor interested in acquiring a twenty-unit apartment complex needs to calculate the potential price they should pay based on the expected income and a given capitalization rate. To determine the value, we first calculate the potential gross income (PGI) from the apartments, adjust for vacancy and collection losses, subtract operating expenses, and apply the capitalization rate to find the value of the property. The formula for capitalization value is Value = Net Operating Income (NOI) / Capitalization Rate.
First, let's calculate the PGI:
- 10 units × $300/month = $3,000/month
- 5 units × $325/month = $1,625/month
- 5 units × $350/month = $1,750/month
Adding these sums gives us a total PGI of $6,375/month, or $76,500/year.
Next, we account for the vacancy and collection losses at 5%:
- Losses = 5% × $76,500/year = $3,825/year
- Effective Gross Income (EGI) = PGI - Losses = $76,500/year - $3,825/year = $72,675/year.
Now, we subtract operating expenses from the EGI to get the NOI:
- NOI = EGI - Operating Expenses = $72,675/year - $31,950/year = $40,725/year.
Finally, using a capitalization rate of 10%, the value of the property is calculated as:
- Value = NOI / Capitalization Rate = $40,725/year / 0.10 = $407,250.
Therefore, based on the given information and a 10% capitalization rate, the investor should consider paying $407,250 for the apartment complex.