Question

You are considering the purchase of an office building for $1.5 million today. Your expectations include the following: first-year potential gross income of $340,000; vacancy and collection losses equal to 15 percent of potential gross income; operating expenses equal to 40 percent of effective gross income and capital expenditures equal 5 percent of EGI. You expect to sell the property five years after it is purchased. You estimate that the market value of the property will increase four percent a year after it is purchased and you expect to incur selling expenses equal to 6 percent of the estimated future selling price. What is the estimated going-in cap rate (Ro) using NOI for the first year of operations

Answer 1

$289,000

Step-by-step explanation:

Item

Amount

Potential gross income (PGI)

$340,000

less: V&C allowance (at 15% of PGI)

51,000

Effective gross income (EGI)

$289,000