A property was purchased 5 years ago for S1 million and generated NOl of $70,000 in Year 1.The NOl will increase at 5% per annum. If the forward cap rate of the property has risen by 1%today compared to 5 years ago, what price would a potential buyer have to pay for theproperty now, if they used forward cap rates exclusively?
Question
A property was purchased 5 years ago for S1 million and generated NOl of $70,000 in Year 1.The NOl will increase at 5% per annum. If the forward cap rate of the property has risen by 1%today compared to 5 years ago, what price would a potential buyer have to pay for theproperty now, if they used forward cap rates exclusively?
Solution
To calculate the price a potential buyer would have to pay for the property now using forward cap rates, we first need to calculate the Net Operating Income (NOI) for the current year and then apply the new cap rate.
First, let's calculate the NOI for the current year (Year 5). The NOI in Year 1 was 70,000 * (1 + 0.05)^4 = $85,386.75. (We raise to the power of 4 because the increase happens at the end of each year, so after 5 years, the increase has happened 4 times.)
Next, let's calculate the price using the new cap rate. The cap rate has risen by 1% compared to 5 years ago. If we assume that the cap rate 5 years ago was x, then the new cap rate is x + 0.01.
The price of a property is calculated as the NOI divided by the cap rate. So, the price a potential buyer would have to pay for the property now would be $85,386.75 / (x + 0.01).
However, without knowing the original cap rate (x), we cannot calculate the exact price. The question does not provide enough information to give a specific answer.
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