You are considering purchasing a property with an asking price of $8,000,000. Yo

Question

You are considering purchasing a property with an asking price of $8,000,000. Your estimated NOI for this property is $500,000. You search for a comparable property, and find a property that sold last year for $10,000,000 and has NOI of $550,000. You anticipate that the growth rate of the property you are considering purchasing will be 2% a year indefinitely. Based solely on the assumption that this is a good comp and the utilization of the direct capitalization rate method, is the asking price of the building too high or too low? By how much? If the price is too high, enter your answer as a positive number. If the price is too low, enter your answer as a negative number. Round your answer to the nearest cent. Omit the dollar sign from your answer.

Explanation / Answer

Comparable’s cap rate: 550,000/10,000,000 = .055

Asking cap rate: 500,000/8,000,000 = .0625

Asking cap rate is higher.

The asking price should be
500,000/X=0.055 (equating asking cap rate with comparable's cap rate)
=> X = $9,090,090

Thus, Asking price is too low by -1,090,090.
Answer is denoted as a negative number, since the question asks to denote answer as a negative number if the price is too low.

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