A property was purchased for $4,500,000.00 and cars a rental income of S50,000.00 per month. Mr. Johnson. he owner, has to pay annual property tax of 1% of value, grounds maintenance fee of 0.2% , of value and a common area lighting and maintenance fee of $46,000.00 per annum. A slightly larger property on the same block is now up for sale and the current tenants are paying a monthly rental of S55.000.00. Mr. Johnson has ascertained that the expenses ratio for properties in the area is constant. He wants to

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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A property was purchased for $4,500,000.00 and cars a rental income of S50,000.00 per month. Mr.
Johnson. he owner, has to pay annual property tax of 1% of value, grounds maintenance fee of 0.2%
, of value and a common area lighting and maintenance fee of $46,000.00 per annum. A slightly larger
property on the same block is now up for sale and the current tenants are paying a monthly rental of
S55.000.00. Mr. Johnson has ascertained that the expenses ratio for properties in the area is constant.
He wants to purchase this new property and has now asked you to use the income capitalisation
approach to real estate valuation to advise him on the following.

What is the annual capitalisation rate that this property will attract? (round answer to five
decimal places)
What is the maximum amount that he should pay for this property given that he does not want
to pay more than it is valued? ((round answer to the nearest $1000)
How many years will it take for the net income to cover the purchase price of the new building?

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