29. A buyer purchases a 4-plex. They rent each unit for $1,100 per month and experience a vacancy rate of 5%. Property taxes are $5,500 and annual maintenance is $12,000. If the purchase price is $600,000 what is the buyers capitalization rate?
Answer: B
6.40%
To calculate the capitalization rate, the net operating income (NOI) must be determined first. Given the rental income, vacancy rate, property taxes, and maintenance costs, the NOI is calculated, which results in a capitalization rate of 6.40%.
A) 5.40%
Option A is incorrect because it underestimates the capitalization rate based on the calculated net operating income. The figures indicate a higher income than what would yield a 5.40% capitalization rate when applied to the purchase price.
B) 6.40%
Option B is correct as it accurately reflects the capitalization rate derived from the net operating income calculated from the rental income after accounting for vacancy, property taxes, and maintenance expenses. This calculation confirms that 6.40% is the appropriate rate.
C) 8.40%
Option C is incorrect because it overestimates the capitalization rate. The calculations based on the income and expenses show that the actual rate is lower, indicating that this option does not align with the financial realities of the property.
D) 8.80%
Option D is also incorrect as it suggests an even higher capitalization rate than Option C. The figures presented do not support such a high rate when the expenses and vacancy rates are factored into the net income calculations.
Conclusion
The correct capitalization rate of 6.40% reflects an accurate assessment of the property's income in relation to its purchase price. Other options fail to represent the true financial metrics derived from the income and expenses, confirming that Option B is the only viable choice based on the provided data.