You have been asked to estimate the market value of an apartment complex that is producing annual net operating income of $44,500. Four highly similar and competitive apartment properties within two blocks of the subject prop- erty have sold in the past three months. All four offer essen- tially the same amenities and services as the subject. All were open-market transactions with similar terms of sale. All were financed with 30-year fixed-rate mortgages using 70 percent debt and 30 percent equity. The sale prices and estimated first year net operating incomes were as follows:

Comparable 1: Sales price $500,000; NOI $55,000

Comparable 2: Sales price $420,000; NOI $50,400

Comparable 3: Sales price $475,000; NOI $53,400

Comparable 4: Sales price $600,000; NOI $69,000

What is the indicated value of the subject property using direct capitaliation?

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tutorAnne tutorAnne · Answer 1 · 2020-04-26T16:56:05+02:00

Answer: indicated value of the subject property using direct capitaliation is = $390,351= $390,000

Explanation:The abstracted going-in capitalization rates from the four properties will be calculated using

The going-in cap rate which is first-year net operating income (NOI) divided by the initial investment or purchase price

For Comparable 1: 55,000/ 500,000= 0.110

Comparable 2: 50,400/420,000= 0.120

Comparable 3: 53,400/ 475,000=0.112

Comparable 4: 69,000/600,000= 0.115

Calculate the Simple Ave. we have 0.110+0.120+0.112+0.115/4= 0.114

The simple average of the four comparable cap rates is 0.114. Therefore the indicated value of the subject property is $390, 351 gotten from

($44,500 / 0.114) = $390,351= $390,000