You own a small investment property and are considering sell

You own a small investment property and are considering selling it. Your property has NOI of $120,000. You have identified 4 comparable properties that all sold recently. All four offer essentially the same amenities and services as the subject. All were open-market transactions with similar terms of sale with 30-year fixed-rate mortgages using 70 percent debt and 30 percent equity. The sale prices and estimated first-year net operating incomes were as follows: Comp NOI $85,000 $92,000 Sale Price $1,416,667 $1,415,385 C $88,000 $1,353,846 D $95,000 $1,583,333 Ql: What is the indicated market value of your property? Explain/show how you determined this. Hint: this problem uses cap rates.

Solution

Cap rate for A=85000/1416667=6%

Cap rate for B=92000/1415385=6.5%

Cap rate for C=88000/1353846=6.5%

Cap rate for D=95000/1583333=6%

Average cap rate=6.25%

Hence, market value of our property=120000/6.25%=1920000