Question

"Bob wants to buy a building. He computes the annual NOI for the following year to be $275,000. The seller s asking price for the building is $5,000,000. Bob finds a similar building nearby which sold for $6,000,000 last year and had an NOI of $360,000. If Bob thinks the building he wants to buy should sell at the same cap rate as the similar building, how much should Bob offer?"

Answer 1

Answer:

BOB should offer 4,583,333 for the building if he wants the cap rate to be the same as the similar building.

Explanation:

The cap Rate is used to to calculate how much income a building or a property generates compared to its price it is bought at, so in order to find the cap rate we divide the annual NOI by it's price. In this question we will have to calculate the cap rate of the similar building which was sold for 6,000,000 and then use that cap rate to find what should the price of the building be that BOB wants to buy.

Cap rate = Annual NOI/Price

Cap rate of similar building = 360,000/6,000,000=0.06=6%

Now we will substitute 6% in the formula to find the price of the building BOB wants to buy.

0.06=275,00/Price

Price = 275,000/0.06=4,583,333