Question

Lonnie is considering the purchase of a rental property with several units. The property rents for $8,600 a month when all units are occupied. When all units are occupied, additional income from on-sight laundry facilities is expected to be $200 a month. The units are expected to be rented 85% of the year. Additional expenses associated with the property include real estate taxes of $10,000 a year, liability insurance of $3,500 a year, advertising expense of $1,500 a year, maintenance costs of $12,500 a year, depreciation of $20,500 a year, and interest expense on the property loan of $24,000 a year. If Lonnie's required rate of return on the property is 11%, what is the intrinsic value of the property?

Answer 1

The intrinsic value of the rental property is estimated to be approximately -$107,818. Please note that a negative value suggests that the property is not a favorable investment at Lonnie's required rate of return of 11%.

Step-by-step explanation:

To calculate the intrinsic value of the rental property, we need to estimate the net cash flows generated by the property and discount them to the present value using Lonnie's required rate of return of 11%. Let's break down the calculation:

1. Net rental income per month = Rental income - Expenses = $8,600 + $200 - ($10,000 + $3,500 + $1,500 + $12,500) = $4,800
2. Net rental income per year = Net rental income per month × 12 = $4,800 × 12 = $57,600
3. Net rental income after accounting for vacancy rate = Net rental income per year × (1 - vacancy rate) = $57,600 × (1 - 0.85) = $8,640
4. Net cash flow after accounting for depreciation = Net rental income after accounting for vacancy rate - Depreciation = $8,640 - $20,500 = -$11,860
5. Intrinsic value of the property = Net cash flow after accounting for depreciation / Rate of return = -$11,860 / 0.11 = -$107,818 (rounded to the nearest dollar)

Based on these calculations, the intrinsic value of the rental property is estimated to be approximately -$107,818. Please note that a negative value suggests that the property is not a favorable investment at Lonnie's required rate of return of 11%.

Answer 2

$ 347,818

Step-by-step explanation:

Intrinsic value of property = Net operating income / Capitalisation rate

WHILE

Net operating income = Earning from property - Operating expenses which is related to property

Earning from Property =

($8600+$200)*12*85%

=$8800*12*0.85

=$89,760

Operating expenses;

Property tax $10,000

Insurance $3,500

Advertising expenses $1,500

Maintenance cost $12,500

Interest expenses $24,00

Total $51,500

Net operating income =$89,760-$51,500

=$38,260

Net operating income for perpetuity

Intrinsic value = 38260/0.11

=$ 347,818

Therefore the intrinsic value of the property is $ 347,818