Question

Given the following information, calculate the going-in capitalization rate for the following apartment complex. In your calculations, assume no miscellaneous income and above-the-line treatment of capital expenditures.

Number of apartment units: 15
Monthly rent per unit: $3,000
Vacancy and collection loss: 10% of potential gross income
Operating expenses: 5% of effective gross income
Capital expenditures: 10% of effective gross income
Acquisition price: $3,420,000

a. 0.81%
b. 1.01%
c. 13.50%
d. 15.79%
e. 12.08%

Answer 1

The correct option is b. 1.01%.

Step-by-step explanation:

This can be calculated as follows:

Potential gross income = Number of apartment units * Monthly rent per unit = 15 * $3,000 = $45,000

Therefore, we have:

Details Amount ($)

Potential gross income (PGI) 45,000

Vacancy and collection loss (10% of PGI) (4,500)

Effective gross income (EGI) 40,500

Operating expenses: 5% of effective gross income (2,025)

Capital expenditures (10% of effective gross income) (4,050)

Net operating income 34,425

Acquisition price = 3,420,000

Going-in capitalization rate = Net operating income / Acquisition price = $34,425 / $3,420,000 = 0.0101, or 1.01%

Therefore, the correct option is b. 1.01%.