Topics › Alternative Investments
Real Estate and Infrastructure: practice question
An analyst at Merrow Realty Advisers values a small office property using the direct capitalization method. The property has potential gross income of $800,000, vacancy and collection losses equal to 5.0% of potential gross income, and operating expenses of $130,000. The market capitalization rate for comparable properties is 7.0%. The estimated value of the property is closest to:
- $9.0 million
- $9.6 million
- $10.9 million
Show answer and explanation
Correct answer: A
Working: EGI = 800,000 × (1 − 0.05) = 760,000; NOI = 760,000 − 130,000 = 630,000; Value = NOI/cap rate = 630,000/0.07 = 9,000,000
Explanation: A is correct: effective gross income is 760,000, net operating income is 630,000, and dividing by the 7.0% market cap rate gives 630,000/0.07 = $9.0 million. B is wrong because it skips the vacancy deduction, capitalizing 670,000 (800,000 − 130,000) at 7.0% to get $9.6 million. C is wrong because it capitalizes effective gross income of 760,000 without deducting operating expenses, overstating value at $10.9 million.
More Alternative Investments practice Try a mock exam
More free Alternative Investments questions
- Two hedge funds run the same strategy with the same expected gross return and the same fee…
- An allocator performing due diligence on the Nethermoor Fund, a privately offered hedge fund,…
- Silvermere Ventures reports cumulative paid-in capital of $400.0 million, a distributions to…
- Torpoint Credit Opportunities, a private debt fund, buys senior secured bank loans of issuers that…