Question

Richard Jenkins is thinking of buying an apartment complex that is offered for sale by WKG Realty, an investment brokerage firm. The listing price of $3,250,000 equals the property's market value. The following statement of income and expense is presented for the buyer's consideration: $504,000 10,000 $514,000 The Pierre Apartments Prior Year's Operating Results. Presented by WKG Realty 30 units, all two-bedroom apartments, $1400 per month Washer and dryer rentals Gross annual income Less operating expense: Manager's salary Maintenance staff (part time) Landscaping and snow removal Property taxes Net operating Income $34,000 12,000 2,500 14,200 62,700 $451,300 By checking the electric meters during an inspection tour of the property, the buyer determines the occupancy rate to be about 80%. He learns, by talking to tenants, that most have been offered inducements such as a months' free rent or special decorating allowances. A check with competing apartment houses reveals that similar apartment units rent for about $1290 per month and that vacancies average about 6%. Moreover, these other apartments have pools and other amenities that make their units worth about $20 more than those of The Pierre Apartments, which have neither. The tax assessor states that the apartments were reassessed 12 months ago and that the current taxes are $85,039. Jenkins learns that the super at the apartment complex, in addition to the $34,000 salary, gets a free apartment for her services. He also discovers other expenses: insurance will cost $7.00 per $1,000 of coverage, based on estimated replacement cost of about $1.9 million workers' compensation ($145 per annum) must be paid to the state; utilities, incurred to light hallways and other common areas, cost about $95 per month for similar properties; supplies and miscellaneous expenses typically run about 0.30% of effective gross income. Professional property management fees in the market area typically are about 6% of effective gross income. Assignments: 1. Develop a prior years' reconstructed operating statement, assuming typically competent, professional management. Based on the reconstructed NOI and current market value, determine the property's capitalization rate.

I know this is a long one but I would really appreciate all the help that I can get. Thank You!!! Oh and for inflation rate take 2.25%. Oh and please only do part 4.

Answer 1

Answer for part 4 only,

Suggest some reason why market capitalization rate might not remains constant ? Why might it smaller or larger than current prevailing market?

Answer:

Definition: Capitalization rate, commonly known as cap rate, is a rate that helps in evaluating a real estate investment. Cap rate = Net operating income / Current market value (Sales price) of the asset.

Capitalization rate shows the potential rate of return on the real estate investment.

Reason for fluctuations

1. Demand and supply of investment
2. People invest in low value , when rate decrease and sell in high value with high rate
3. Political causes , when suddenly changes in investment rules and regulations
4. Spectators effect.
5. As word says MARKET it always in fluctuations way not remains constant
6. Entry and exit of new and existing company and firm
7. Geographic conditions
8. Different market section
9. New offer and policy on investment
10. Scams and illegal actiactivities
11. Price effects
12. When demand increase then rate is also larger than current prevailing market and demand decrease then rate is also smaller than current pprevailing market
13. Other reasons

This is reason for market capitalization rate is not remains constant.

Thank you .