Question

The owner of a commercial warehouse has the building listed for $250,000. The net income of the building is $20,000. An investor wants to buy it at a cap rate of 12%. Will the investor offer the owner the same price as the owner has it listed for? If not, by how much will the owner have to change his price to meet the investor's request for a 12% cap rate? Hint: Income Generated/Rate = Value.

Answer 1

Answer:

$166,667; owner would have to reduce his listed price by $83,333.

Explanation:

Given a net income of $20,000 and a cap rate of 12%, the value that the investor would be willing to pay

= $\frac{Net Income}{CapRate} = \frac{20,000}{0.12} = 166,667$

As such, the investor would not offer the owner the same price the owner has  listed the property for. He would offer a lower amount of $166,667.

And the owner would have to reduce his listed price by $250,000 - $166,667 = $83,333 to meet the investor's request.