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Exercise - Income Approach
Exercise - Income Approach
Property consists of 10 office suites, 4 on the first floor and 6 on the second.
Contract rents: 2 suites at $1,500 per month, 2 at $3,600 per month, and 6 at
$1,560 per month.
Vacancy and collection losses: 10% per year
Operating expenses: 40% of effective gross income each year;
Capital expenditures: 5% of effective gross income each year;
Expected holding period: 5 years;
PGI increasing 3 percent per year. Selling expenses are forecasted to be 4
percent of the expected sale price.
Using DCF approach to estimate the value of the property.
A $500,000 $55,000
B $420,000 $50,400
C $475,000 $53,400
Note:
Year 1 2 3 4 5
1. Using the information provided, calculate the overall capitalization rate by direct
market extraction assuming each property is equally comparable to the subject.
2. Using cap rate in Question 1, compute a value for the property using direct
capitalization.
3. Using cap rate in Question 1, the property will be held by a buyer for five years,
compute the value of the property based on discounting unlevered cash flows.
4. Using cap rate in Question 1, the property will be held by a buyer for five years,
what is the present value of the levered cash flows?