Annual net rental income from this building is $10,000 and is expected to grow a

Question

Annual net rental income from this building is $10,000 and is expected to grow at 1.5% annually; Given the current economic conditions, the investor doesn't have many opportunities for other investments and his total required return is 9.5%.

a.   What is the implied cap rate for this investor? Explain.

b.   What is the price the investor is willing to pay for this building?

c.   Suppose that the economic conditions improve, and the expected growth rate for rent becomes 3% and the net rental income becomes $12,000, what would be the value of this apartment building?

Explanation / Answer

a. Implied cap rate is 9.5% because it is the opportunity cost of the funds that could have been invested elsewhere. So this is the minimum amoun that the investor should expect so that he can invest in the building

b. Price of the building = 10,000/(0.095 - 0.015) = 125,000

c. price of the building = 12,000/(0.095 - 0.03) = 184,615.38

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