A) Use the Capitalisation Approach for the Following Situation to Determine

question 13

Essay

a) Use the capitalisation approach for the following situation to determine a market value for a residential investment property that is planned to be rented for a net amount of $20,000 p.a..
There have been three recent sales of rental properties recorded in a similar location, as follows:
$\begin{array} { l c c c } \text { Similar property } & \text { Annual rent } & \text { Sale price } & \begin{array} { c } \text { Rate of return } \\\text { (capitalisation rate) }\end{array} \\\text { 62 Gray Street } & \mathbf { \$ 2 2 , 0 0 0 } & \mathbf { \$ 2 8 0 , 0 0 0 } & 7.86 \% \\\text { 150 White Avenue } & \mathbf { \$ 1 9 , 0 0 0 } & \mathbf { \$ 2 5 5 , 0 0 0 } & 7.45 \% \\\text { 33 Black Road } & \mathbf { \$ 2 1 , 0 0 0 } & \mathbf { \$ 2 7 0 , 0 0 0 } & 7.78 \%\end{array}$

b) The capitalisation method can also be used to determine the net rent income that can be demanded from a tenant. Suppose a person paid $290,000 for a rental property in a similar area and required a net rental return (after annual operating expenses of $11,000) of 9.0% p.a. from the investment. What would be the gross rental income that could be expected?

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