Question

Given the following owner’s income and expense estimates for an apartment property, formulate a reconstructed operat-ing statement. The building consists of 10 units that could rent for $550 per month each. Owner’s Income Statement Rental income (last year) Less: Operating & Capital Expenses Power Heat Janitor Water Maintenance Capital Expenditures Management Depreciation (tax) Mortgage payments $ 2,200 1,700 4,600 3,700 4,800 2,800 3,000 5,000 6,300

Estimating vacancy and collection losses at 5 percent of potential gross income, reconstruct the operating state-ment to obtain an estimate of NOI. Assume an above-line treatment of CAPX. Remember, there may be items in the owner’s statement that should not be included in the recon-structed operating statement. Using the NOI and an Ro of 11.0 percent, calculate the property’s indicate market value. Round your answer to the nearest $500.

Answer 1

The reconstructed operating statement estimates an NOI of $42,700 for an apartment property, based on a potential gross income of $66,000 and total operating expenses of $20,000. Using an 11% capitalization rate, the indicated market value of the property is approximately $388,000.

Step-by-step explanation:

Reconstructing an Operating Statement

To reconstruct the operating statement and estimate the Net Operating Income (NOI), we must first calculate the potential gross income. With 10 units renting at $550 each per month, the annual potential gross income is 10 units × $550 × 12 months = $66,000. After estimating vacancy and collection losses at 5%, the effective gross income becomes 95% × $66,000 = $62,700. Next, we sum up the operating & capital expenses, excluding mortgage payments, depreciation, and capital expenditures because they are not operating expenses. So, the total expenses are $2,200 (power) + $1,700 (heat) + $4,600 (janitor) + $3,700 (water) + $4,800 (maintenance) + $3,000 (management) = $20,000.

Subtracting these from the effective gross income provides us with the NOI: NOI = $62,700 - $20,000 = $42,700. Using the capitalization rate (Ro) of 11.0%, the indicated market value of the property is NOI ÷ Ro = $42,700 ÷ 0.11 = $388,181.82, which rounded to the nearest $500 is $388,000.

Answer 2

$363,000

Step-by-step explanation:

Calculation for the property’s indicate market value.

First step

Operating Statement

PGI: $66,000

(10 units x $550 x 12 month )

Less: Vacancy Loss(3,300)

(5%*66,000)

EGI:62,700

Less: Operating Expenses

Power$2,200

Heat1,700

Janitor4,600

Water3,700

Maintenance4,800

Management3,000

Reserve for CAPX2,800

Total Operating Expenses$22,800

Net Operating Income$39,900

(62,700-22,800)

Second step is to find the property’s indicate market value.

Using this formula

Market Value=NOI/ Ro

Let plug in the formula

Market Value=$39,900/11.0%

Market Value=$363,000

Therefore the property’s indicate market value is

$363,000