A Real Estate investment Company (REIC) has a weighted average cost of capital at 10% and$2 million of total capital to invest. The REIC aims to earn rental income from the investmentand do not intend to sell the property in the short term. Which of the following property is themost appropriate one to invest? Property A: 10% Cap Rate, NOI S100.000a Property A: 11% Cap Rate NOI S180.000o b OaNone of the above Property A: 12% Cap Rate, NOI $300.000Od e. Property A:8% Cap Rate, NOI S400.000
Question
A Real Estate investment Company (REIC) has a weighted average cost of capital at 10% and300.000Od e. Property A:8% Cap Rate, NOI S400.000
Solution
The most appropriate property to invest in would be the one that provides the highest return relative to the cost of capital. The cap rate, or capitalization rate, is a measure of the potential return on a real estate investment. It is calculated by dividing the Net Operating Income (NOI) by the property's market value.
Given that the REIC's weighted average cost of capital is 10%, they would want to invest in a property with a cap rate that is higher than this to ensure a positive return on investment.
From the options provided:
Property A: 10% Cap Rate, NOI 180,000 Property C: 12% Cap Rate, NOI 400,000
Property C with a 12% cap rate and NOI of $300,000 would be the most appropriate investment. This is because it has the highest cap rate, which exceeds the REIC's cost of capital, and also provides the highest NOI.
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