Question 2 Horatio Ltd. wishes to purchase a rental apartment as part of its pro

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Question 2
Horatio Ltd. wishes to purchase a rental apartment as part of its property portfolio. Gross rental income is expected to be $380 per week. Expenses would include council rates $1,300 per annum, utilities rates $850 per annum, maintenance $2030 per annum, body corporate fees $640 per annum, real estate agent fees $30 per week, and estimated stamp duty of $15,000. Rental returns and Horatio Ltd’s. required rate of return are identical at 6.5%.

a) What is Horatio Ltd’s. maximum willingness to pay for this property using the net capitalization method 4 Marks
b) If Horatio Ltd. purchased this property for $220,000, what would its annual return be?

Explanation / Answer

Stamp duty $15000 is a one time fee on buying the property & hence will be added to cost of property (Just like we add Inst cost to a machinery) Annual Rental Income = 52 weeks *$380 per week = $19760 Annual Var expenses are :- Council Rate $1300 Utility Rate $850 Maint $2030 Cor Fee $640 Real Estate agent Fee 30*52week = $1560 --------------------------------------------------- Total Annual Var exp = $6380 SO Net Annual Income = 19760-6380 = $13,380 Capitalization Rate = Net Annual Income/Cost of property So Cost of property = 13380/6.5% = $205,846 This includes Stamp duty of $15000. SO Horatio will be willing to pay a maximum amount of $205,846-$15000 = $190,846 ...Ans (a) b) If Purchase price is $220,000. Add stamp duty $15000. So Cost of property = 235000 So Capitalization Rate = 13380/235000 = 5.69%....................Ans (b)

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