CFA Level 1: Value of Real Estate Investment

Value of Real Estate Investment

Prev Question Next Question

Question

An analyst is interested in determining the value of a real estate investment and has estimated the following data for the property:

----------------------------------------------------------------------------------

Net operating income $50,480 Cost of debt 8.2%

Depreciation $3,550 Cost of equity 12.5%

Interest expense $2,720 WACC 9.6%

Tax rate 35% Cap rate 11.0%

----------------------------------------------------------------------------------

Which of the following is closest to the value of the property using the income approach?

Answers

Explanations

Click on the arrows to vote for the correct answer

A. B. C.

B

To determine the value of the property using the income approach, we need to calculate the Net Operating Income (NOI) and then divide it by the Capitalization Rate (Cap rate).

  1. Calculate the Net Operating Income (NOI): The Net Operating Income is calculated by subtracting operating expenses (excluding interest and taxes) from the property's gross income.

Given: Net operating income (NOI) = $50,480

  1. Calculate the Capitalization Rate (Cap rate): The Capitalization Rate (Cap rate) is the rate of return expected by an investor on a property. It is calculated by dividing the Net Operating Income (NOI) by the value of the property.

Given: Cap rate = 11.0%

Using the formula: Cap rate = NOI / Property value

Rearranging the formula, we get: Property value = NOI / Cap rate

  1. Calculate the value of the property: Property value = $50,480 / 11.0% = $459,818.18 (rounded to the nearest dollar)

The closest answer among the given options is B. $458,900.

Therefore, the value of the property using the income approach is approximately $458,900.

Prev Question Next Question