Question

A rental property produces $3,750 a month before expenses. If the capitalization rate for the property is 20% and the property expenses are $1,500 a month, what is the current value of the property?

([Gross Monthly Income - Monthly Property Expenses] / Capitalization Rate = Current Property Value)

Answer 1

The current value of the rental property is calculated by subtracting property expenses from gross monthly income to find the net operating income, annually multiplying it, and then dividing by the capitalization rate. In this case, the rental property value is $135,000.

Step-by-step explanation:

To determine the current value of the rental property, we need to calculate the net operating income (NOI) and then apply the capitalization rate (cap rate) formula. The NOI is calculated as the rental property produces minus the property expenses. First, let's calculate the monthly NOI:

$3,750 (Gross Monthly Income) - $1,500 (Monthly Property Expenses) = $2,250 (Net Operating Income per month)

To find the annual NOI, we multiply by 12:

$2,250 x 12 = $27,000 (Annual Net Operating Income)

Now, we apply the cap rate formula to find the current property value:

Current Property Value = Annual NOI / Capitalization Rate

Current Property Value = $27,000 / 0.20 (20%)

Current Property Value = $135,000

Therefore, the current value of the rental property is $135,000.