### CFA Practice Question

A real estate analyst projects yearly gross rents of 1.5 million with an 8% vacancy factor for a rental property. Insurance and taxes are expected to consume 10% of gross revenue, with utilities averaging 22%. Repairs and maintenance account for 15% of gross revenue. If the market cap rate for similar properties requires a premium of 2% over the average equity market return of 7.8%, what is the fair value of this property?
A. 6,098,281
B. 8,150,913
C. 8,112,245
Explanation: NOI = 1,500,000 x (1 - 0.10 - 0.22 - 0.15) = 795,000
Cost of equity = 7.8% + 2.0% = 9.8%
Appraised value = 795,000 / 0.098 = 8,112,245

User Comment
babaj what about the vacancy factor?
nike it does not matter as you already have the gross rent.
jckasn shouldnt the question refer to net rent as opposed to gross rent to indicate that it is inclusive of the vacancy factor??
egghead agree, jckasn. but looking differently, 1.5 mio is not a capacity, bur projected proceeds and vacancy rate is not applicable. gross here may mean before operational costs.
steved333 Yeah, I feel your pain, but this test is designed not only to test your skill, but also to see if you can cut through their word games, bullshit, and useless info to get the right answers.
Xocrevilo Whether to include the vacancy factor or not is totally debatable, thus I decided to calculate two answers, one including the vacancy factor impact and one not including it. I would describe this as "exam technique", or gaming, and clearly an irrelevant skill for the outside world...
chamad If you keep doing the same long exercise with all questions like this, you'll be very soon out of the game. Do you think we have enough time to go trough many calculations? 180mn looks enough...in fact it's very short on the exam's day!!1 good luck everybody
dlukas The vacancy factor would already have been applied to calc the gross rents.
StanleyMo we should feel lucky as we did not have the correct answer to choose if we include the vacancy factor, forcing us to review again.
colinn The CFAI book (p192) gives "gross potential rental income" and then deducts vacancy losses. Scanning the chapter and practice problems, I see this term used a handful of times, and I do not see "yearly gross rents". My conclusions:

1. Gross potential rental income is before deducting vacancies. Yearly gross rent is after deducting vacancies.
2. Given that CFAI doesn't include gross rent, I don't think we need to worry about this distinction on the exam.
erinelize Meaning we should always include the vacancy factor in our calculations on the real exam?
Gpcurve The only answer that tied out was to assume they meant to say "net rents".
fobucina Net Rent = GPR - Vacancy
NOI = Net Rent - Operating Exp
Insight gained from doing this question = beware of snake questions
cfastudypl Thanks AN for this question, quite interesting.