Real Estate Math
A Wyoming investor paid $275,000 for a duplex. Annual gross rents are $24,000 and operating expenses are $9,600. Using a 10% cap rate, is the property valued correctly?
AYes, it is valued at exactly $275,000
BNo, the income approach suggests a value of $144,000✓ Correct
CNo, the income approach suggests a value of $240,000
DNo, the income approach suggests a value of $340,000
Explanation
NOI = $24,000 - $9,600 = $14,400. Value at 10% cap rate = $14,400 / 0.10 = $144,000. The income approach indicates a value of $144,000—significantly below the $275,000 purchase price. This suggests the buyer may have overpaid relative to income potential, or the 10% cap rate is too high for the market.
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