Question

•You found a rental property that you think would make a good investment. After doing your research you believe that annual rent would be $11,500 per year, and you’ll have the following expenses - $1,150 property management, $1,000 insurance, $300 property taxes, $500 lawncare, and $500 miscellaneous. If you want to earn 8% on your net operating income, how much should you pay for the house? NOI = $8,050

Answer 1

Given Information :

* Expected Annual rent : $11,500

* Expected Annual expenses :

a) Property management - $1,150

b)  Insurance - $1,000

c) Property taxes - $300

d) Lawncare - $500

e) Miscellaneous - $500

* Capitalization rate - 8% or .08 ( Capitalization rate is ratio of Net Operating Income (NOI) to property asset value ).

* Net operating income (NOI) = Expected rent - Expected expenses

= $11,500-($1,150+$1,000+$300+$500+$500)

= $11,500-$3,450 = $8,050

* Payment for the house = Net operating income (NOI) / Capitalization rate

= $8,050 / .08

= $1,00,625.

Therefore, If you want to earn 8% on your Net operating income of $8,050 , the amount to be paid for the house is $1,00,625.