Cap Rate and Years Purchase

Question 1

Calculate the years purchase factor reflected in the following sale
(round your answer to 2 decimal places)
Selling Price $ 600,000
Annual Outgoings $ 4,500 G
ross Annual Rent $ 28,000

Answer 1

Between 25.52 and 25.54

Gross Annual Rent $ 28,000 less Annual Outgoings $ 4,500 = $ 23,500
Selling Price $ 600,000 / $23,500 = 25.53 Years Purchase

Question 2

In markets where capitalisation rates are “hardening”, market values are going up relative to net income.

True or False

Answer 2

True

Question 3

High rates of annual income return relative to current market value indicates a good quality property.

True or False

Answer 3

False

Question 4

A property was sold at a price reflecting 14 years purchase. What is the capitalisation rate is reflected in the sale?

Answer 4

Between 7.13 and 7.15

100 / 14YP = 7.14%

Question 5

The costs of entering into an annual maintenance contract for elevator plant and equipment would be:

Select one:
A. An operating expense
B. A capital expense
C. Neither an operating or capital expense
D. Disregarded in calculating the value of a property

Answer 5

A. An operating expense

Question 6

Where capitalisation rates are “hardening”, this means that capitalisation rates are going down.

True or False

Answer 6

True

Question 7

Where capitalisation rates have “softened” over a period of time, market values are likely to have been falling.

True or False

Answer 7

Trie

Question 8

Instructions - Select all correct answers.

A low capitalisation rate would indicate:

A. a well located property
B. a poorly located property
C. a property in good condition
D. a property in poor condition
E. a property with a good quality tenant
F. a property with a poor quality tenant
G. a property with a long term lease in place
H. a property with a short term lease in place

Answer 8

A. a well located property
C. a property in good condition
E. a property with a good quality tenant
G. a property with a long term lease in place

Question 9

Instructions - select all correct answers.

The gross income of a property is:

A. calculated by adding “recoverable outgoings” to the “net rent”

B. calculated by deducting “recoverable outgoings” from the “net rent”

C. the same as the “gross rent”

D. the rent payable by the tenant where there is no associated “recoverable outgoings” liability

Answer 9

A. calculated by adding “recoverable outgoings” to the “net rent”

C. the same as the “gross rent”

Question 10

A low capitalisation rate would reflect a high years purchase factor.

True or False

Answer 10

True

Question 11

A property is initially sold at a capitalisation rate of 7.5% and then resold one year later at a capitalisation rate of 6%. On the basis that the net rental remained the same, the value of the property has gone:

A. Up
B. Down
C. Remained the Same
D. The cap rate is irrelevant to market value

Answer 11

A. Up

Question 12

Which of the following expenses would NOT be taken into consideration in calculating the net income of a property?

A. Gross Income
B. Outgoings
C. Capital Expenses
D. Council Rates

Answer 12

C. Capital Expenses

Question 13

Which of the following items is NOT a capital expense:

A. replacement of roof cladding
B. extension to ground floor
C. owner installs central air-conditioning system
D. replace driveway, kerb & guttering
E. replace broken door hinge
F. install sprinkler system due to council or

Answer 13

E. Replace broken door hinge

Question 14

A property recently sold at a price reflecting 9 years purchase. The capitalisation rate reflected in the sale would be:

(Note - Round your answer to 2 decimal places).

Answer 14

Between 11.1 and 11.12

100 / 9YP = 11.11%

Question 15

Instructions - select all correct answers.

Long term vacancy allowances are used to:

A. Make an allowance for loss of rent in perpetuity due to vacancy
B. Allow for the situation where an investment property is vacant at the time of valuation
C. Correct for markets with unusually high or low actual vacancy rates
D. Determine long term capital expense budgets

Answer 15

A. Make an allowance for loss of rent in perpetuity due to vacancy

Question 16

The Capitalisation Rate multiplied by the Years Purchase always equals…

Answer 16

Between 100 and 100

Question 17

You have been provided with last years accounts for a residential investment property. Calculate the estimated net income amount you would apply in a valuation.

Gross Income $ 185,000
Council Rates $ 3,000
Water Rates $ 3,000
Land Tax $ 6,000
Long Term Vacancy Rate 3%
Capital Expenses $ 12,000
Management Fees $ 9,250
Insurances $ 4,000
Repairs & Maintenance $3,700

Answer 17

Between 150,500 and 150,500

$ 185,000

LESS
Council Rates $ 3,000
Water Rates $ 3,000
Land Tax $ 6,000
Long Term Vacancy $ 5,550
Management Fees $ 9,250
Insurances $ 4,000
Repairs & Maintenance $3,700

NET INCOME $ 150,500

Question 18

A property with a high annual net rental relative to its current market value would have a low capitalisation rate.

True or False

Answer 18

False

Question 19

Using a capitalisation rate of 7.5%, calculate the market value of a property having an annual gross income of $62,000 and annual outgoings of $12,000:
(NOTE - round your answer to whole dollars)

Answer 19

Between 666,665 and 666,667

Gross income of $62,000 LESS annual outgoings of $12,000 = NET INCOME $50,000

(NET INCOME $50,000 / 7.5% CAP RATE) X 100 = $666,666 MARKET VALUE

Question 20

Using a capitalisation rate of 5%, calculate the market value of a property having a gross income of $30,000 and annual outgoings of $10,000

Answer 20

Between 400,000 and 400,000

Gross Income $30,000
less Outgoings $10,000
Net income $ 20,000

$20,000 / 5 x 100 = $400,000

Question 21

The Years Purchase is calculated by:

A. Dividing the market value or sales price by the net income
B. Dividing the gross income by the outgoings
C. Dividing the market value or sales price by the gross income
D. Dividing the net income by the selling price, then multiplying the answer by 100

Answer 21

A. Dividing the market value or sales price by the net income

Question 22

The Capitalisation Rate is expressed as a percentage rate in perpetuity between the current market net income of a property and its current market freehold value.

True or False

Answer 22

True

Question 23

A property has a long term vacancy factor of 8%, a gross income of $1,100,000 and annual operating expenses of $200,000.

Based on this information, what would be the dollar amount for the long term vacancy allowance?

Answer 23

Between 88,000 and 88,000

Gross Income $ 1,100,000 x 0.08% vacancy factor = $ 88,000

Question 24

Determine the capital value for a block of flats which has a gross rental income of $93,000 per annum.

Outgoings (including vacancy) are $19,500 per annum. You believe a capitalisation rate of 6% is appropriate.

Answer 24

Between 1,225,000 and 1,225,000

Gross rental income of $93,000 p.a LESS Outgoings $19,500 per annum.
(NET INCOME $73,500 / CAP RATE 6) X 100 = $1,225,000 Market Value

Question 25

A property with showing a capitalisation rate of 12.5%, would have a years purchase factor of:

Answer 25

8 YP

Question 26

The Net income of a property is determined by:

A. Adding collected rents to recoverable outgoings
B. Allowing for interest payable on any mortgage over the property
C. Deducting annual outgoings from the gross annual rent
D. Deducting annual outgoings from the net annual rent

Answer 26

C. Deducting annual outgoings from the gross annual rent

Question 27

An office floor is available to lease at $550 per square metre per annum net, with recoverable outgoings of $95 per square metre per annum.

Calculate the gross annual rental reflected at the asking price.

Answer 27

Between 645 and 645

Net Rental $550psm ADD recoverable outgoings of $95psm = Gross rental $ 645 psm

Question 28

An office floor is available to lease at $550 per square metre per annum net, with recoverable outgoings of $95 per square metre per annum.

Calculate the gross annual rental reflected at the asking price.

Question 29

A very low years purchase factor would indicate a very high return relative to current market value.

True or False

Answer 29

True

Question 30

Capital Expenses are cost items which may not occur in every year.

True or False

Answer 30

True

Question 31

Define Years Purchase.

Answer 31

The Ratio between Net Income and Market Value expressed as a Multiple.

Number of years required for its income to yield its purchase price.

Question 32

Your client is interested in purchasing a residential flat building having a gross rental income of $312,000 per annum.

Outgoings for the last 12 months are as follows:
‒ Statutory Outgoings $ 12,750
‒ Insurance $ 9,800
‒ Repairs and Maintenance annual allowance $ 8,000
‒ Capital Expenditure (replaced foyer tiling) $ 9,000
‒ Long Term Vacancy Factor 2%

Prepare a detailed calculation showing:
(a) Net Income
(b) Estimated value of the property, given that 7% would be a reasonable capitalisation rate to adopt.

Answer 32

Gross Rental Income $312,000
Less: Outgoings
Statutory Outgoings ($12,750)
Insurance ($9,800)
Repairs & Maintenance (annual allowance) ($8,000)
Long Term Vacancy Factor ($6,240)
Estimated Net Income $275,210

Estimated Capitalised Valuation
$275,210 / 7% = $3,931,571

Question 33

Name 3 types of Adjustments

Answer 33

‒ Capital Expenditure adjustments
‒ Over Market Rent
‒ Under Market Rent
‒ Vacancy and subsequent let up costs
‒ Unpaid Incentives

Question 34

You have been asked to value a commercial building. The council have
advised that due to new fire safety standards the internal stairwell needs to be relined this will cost an estimated $65,000.

In this example we have assumed that both the gross market rental and
outgoings for the coming year will be stable.

Rental Income
Gross Rental (Fully Leased) $120,000 p.a.

Outgoings
Council Rates $3,100
Water Rates $1,680
Land Tax $2,100
Operating Expenses $11,300
Vacancy Allowance 5%

Given the provided figures and a Cap Rate of 6.5%, what would you advise?

Prepare a detailed calculation showing:
(a) Net Income
(b) Unadjusted Market Value
(c) Adjusted Market Value

Answer 34

Gross Rental Income $120,000

Less: Outgoings
Council Rates ($3,100)
Water Rates ($1,680)
Land Tax ($2,100)
Operating Expenses ($11,300)
Vacancy Allowance (5%) ($6,000)
Estimated Net Income $95,820

Capitalisation Rate 6.5%
Unadjusted Market Value ($275,210 / 6.5%) $1,474,153

Plus/(Less): Adjustments
Required Capital Expenditure ($65,000)

ADJUSTED MARKET VALUE $1,409,153

Question 35

You have been asked to estimate the sales price of a residential flat building. The building has 10 flats each let at a gross
rental of $600 per week.

The building was built one year ago and the tenants in the building are now paying over market rents ($50 per week each).

All tenants are in occupation under holding over provisions under the original lease. Similar blocks leased at market rents are selling for a return of 5% net.

The Capitalisation Method applies a current rate of return in perpetuity (Capitalisation Rate) based on the assumption of the property being fully let at market rents.

When using this approach, it is very important to check the rental level against market rental evidence. In the above scenario,legally under the Residential Tenancy Act, tenants on expired leases can give 21 days notice to vacate. As such there is no security of collecting the over market rental component for more than 21 days.

Outgoings
Statutory Outgoings $20,000 p.a.
Operating Expenses $30,000 p.a.
Long Term Vacancy Allowance 2%

Prepare a detailed calculation showing:
(a) Net Income
(b) Unadjusted Market Value
(c) Adjusted Market Value

Answer 35

Gross Rental Income (10 flats x 52 weeks x $550pw) $286,000

Less: Outgoings
Statutory Outgoings ($20,000)
Operating Expenses ($30,000)
Long Term Vacancy Allowance (2%) ($5,720)
Estimated Net Income $230,280

Capitalisation Rate 5%
Unadjusted Market Value ($230,280 / 5% $4,605,600

Plus/(Less): Adjustments
Over Market Rents —- ***

ADJUSTED MARKET VALUE $4,605,600

Note
In this situation a purchaser / valuer may or may notmake an allowance for the fact that tenants are paying a higher rental than that used in this valuation.
However, the maximum that could be applied logically would be 3 weeks so 10 units x $50 per week x 3 weeks = $1,500.

Question 36

You have been asked to estimate the sales price of a commercial building.

The building was leased to the Commonwealth Government on a 10-year lease, 4 years currently remaining until expiry of the lease.

The current rental under the lease is $280,000 gross. There is a ratchet clause in the lease (the rent can not go down due to a market rent review).

Your enquiries reveal that the current market rental value of the building would be $240,000 gross.

Similar commercial properties leased at market rents are selling for a yield of 6% net.

In this case, as we are certain to collect the overmarket component of the rental we view it as an additional income stream which is associated with the property until the lease expires.

Outgoings
Statutory Outgoings $15,000 p.a.
Operating Expenses $35,000 p.a.
Long Term Vacancy Allowance 5%

Prepare a detailed calculation showing:
(a) Net Income
(b) Unadjusted Market Value
(c) Adjusted Market Value

Answer 36

Gross Rental Income $240,000

Less: Outgoings
Statutory Outgoings ($15,000)
Operating Expenses ($35,000)
Long Term Vacancy Allowance (5%) ($12,000)
Estimated Net Income $178,000

Capitalisation Rate 6%

Unadjusted Market Value ($178,000 / 6%) $2,966,667

Plus/(Less): Adjustments
Over Market Rents * $142,644

ADJUSTED MARKET VALUE $3,109,311

*Adjustment Calculation
PMT = $40,000 / 12 = $3,333.33 (monthly over market)
N = 48 months
I = 6/12
BGN Mode
compute PV
Positive adjustment = $142,644

Question 37

You have been asked to estimate the sales price of an industrial property. The lease has 2 years left to go and the passing gross rental is presently $120,000 per annum. There are no reviews remaining in the lease and so you cannot review the rent to market until the current lease expires.

Your enquiries reveal that the rent is below market and that the current market gross rental would be $170,000 per annum.

Sales of similar industrial properties in the area let at market rents are selling at a yield of 7%.

In this case, we adjust for the under market rental for the remaining term of the lease (2 Years)

Outgoings
Statutory Outgoings $10,000 p.a.
Operating Expenses $20,000 p.a.
Long Term Vacancy Allowance 10%

Prepare a detailed calculation showing:
(a) Net Income
(b) Unadjusted Market Value
(c) Adjusted Market Value

Answer 37

Gross Rental Income $170,000

Less: Outgoings
Statutory Outgoings ($10,000)
Operating Expenses ($20,000)
Long Term Vacancy Allowance (10%) ($17,000)
Estimated Net Income $123,000

Capitalisation Rate 7%
Unadjusted Market Value ($123,000 / 7%) $1,757,143

Plus/(Less): Adjustments
Under Market Rents *($93,606)
ADJUSTED MARKET VALUE $1,663,537

*Adjustment Calculation
PMT: $50,000 / 12 = $4,166.66 (monthly under market)
N = 24 months
I = 7/12
BGN Mode
compute PV
Negative adjustment = $93,606

Question 38

You have been asked to estimate the current value of a neighbourhood shopping complex of with a fully leased estimated
market gross rental of $500,000 per annum.

The complex however is 30% vacant and is expected to take 12 months to lease up. Comparable sales show a yield of 5%.

Leasing up costs are estimated as:
‒ Agents Leasing fees: 15% of gross rent
‒ Incentives: 3 months gross rent free

Outgoings are provides as per the table:

Outgoings
Statutory Outgoings $50,000 p.a.
Operating Expenses $100,000 p.a.
Long Term Vacancy Allowance 6%

Prepare a detailed calculation showing:
(a) Net Income
(b) Unadjusted Market Value
(c) Adjusted Market Value Capitalisation

Answer 38

Adjustments Calculations

Vacancy
30% of complex for 12 months
PMT: $500,000 x 30% / 12 = $12,500
N = 12
I = 5/12
BGN Mode
compute PV = $146,623.67

Incentive
3 months rent free (commencing in 12
months time)
PMT: $150,000 / 12 = $12,500
N = 3
I = 5/12
BGN Mode
compute PV = $37,344.61

Deferred 12 months:
FV = $37,344.61
N = 12
I = 5/12
BGN Mode
compute PV = $35,526.98

Agency Leasing Fees:
15% of gross rental
FV = ($150,000 x 15%) = $22,500
N = 12
I = 5/12
BGN Mode
compute PV = $21,404.88

Gross Rental Income $500,000

Less: Outgoings
Statutory Outgoings ($50,000)
Operating Expenses ($100,000)
Long Term Vacancy Allowance (6%) ($30,000)
Estimated Net Income $320,000

Capitalisation Rate 5%
Unadjusted Market Value ($320,000 / 5%) $6,400,000

Plus/(Less): Adjustments
Vacancy ($146,624)
Incentive ($35,527)
Agency Leasing Fees ($21,405)
ADJUSTED MARKET VALUE $6,196,444