Given the following information, calculate the going-in capitalization rate for the following apartment complex. In your calculations, assume no miscellaneous income and above-the-line treatment of capital expenditures. Number of apartment units: 15
Monthly rent per unit: $3,000
Vacancy and collection loss: 10% of potential gross income
Operating expenses: 5% of effective gross income
Capital expenditures: 10% of effective gross income
Acquisition price: $3,420,000

a. 0.81%
b. 1.01%
c. 13.50%
d. 15.79%
e. 12.08%

The correct option is b. 1.01%.

Explanation:

This can be calculated as follows:

Potential gross income = Number of apartment units * Monthly rent per unit = 15 * $3,000 = $45,000

Therefore, we have:

Details                                                                              Amount ($)

Potential gross income (PGI)                                              45,000

Vacancy and collection loss (10% of PGI)                          (4,500)

Effective gross income (EGI)                                              40,500

Operating expenses: 5% of effective gross income        (2,025)

Capital expenditures (10% of effective gross income)      (4,050)  

Net operating income                                                        34,425

Acquisition price = 3,420,000

Going-in capitalization rate = Net operating income / Acquisition price = $34,425 / $3,420,000 = 0.0101, or 1.01%

Therefore, the correct option is b. 1.01%.

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- rich people tend to have more capital in their disposal. this would benefit them in business since it is far easier for them to fund their business operation compared to poor people.

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