- CFA Exams
- CFA Level I Exam
- Study Session 15. Alternative Investments
- Reading 39. Private Real Estate Investments
- Subject 4. The income valuation approach
CFA Practice Question
An investor is considering a 20-unit apartment building that is 10 years old and in excellent condition. The potential rent for the building is $625 per month per unit and is expected to increase 3% per year. Total vacancy and bad debt losses are projected at $6,000 per year, with 2% growth per year. Annual operating expenses include $30,000 for maintenance, $8,000 for property taxes, and $2,500 for property insurance. All operating expenses are expected to increase 2% annually. The property is depreciated using the straight-line method over 27.5 years, with an original depreciable basis of $650,000 (land valued at $50,000). The investor is in the 28% marginal income tax bracket, faces a 20% capital gains tax rate, and desires a minimum after-tax rate of return of 15%.
The net operating income for year 2 is closest to:
A. $105,570
B. $107,010
C. $107,070
Explanation: 

User Contributed Comments 4
User | Comment |
---|---|
linr0002 | Depre need not be deducted as maintenance is included Operating income need not take into account taxes |
Lamkerst | NOI is a pre-debt, pre-tax, pre-depreciation thing. |
janis36 | If its year 2, should we not multiply by 1.03 and 1.02 squared? |
pires100 | No janis36, that would be for year 3. |