Question

An income property has 5000 square feet of leasable space, and rents for $8.00 per square foot per year. Vacancy and credit loss are estimated at 4% and operating expenses at 38% of potential gross income. Lenders require a 1.2 Debt Coverage Ratio. Mortgage is available at terms of 25 years, at 15%, payable annually. The investor requires a 14% rate of return on the projects before tax equity cash flow.

If the investor expects a higher rate of inflation over the investment holding period, then he will

1. increase the required rate of return
2. be more concerned about liquidity
3. be more likely to define risk as variance of expected return
4. both a and c

Answer 1

Answer: D both a & c

If the investor expects a higher rate of inflation over the investment holding period,

Most investors aim to increase their long-term purchasing power. Inflation puts this goal at risk because investment returns must first keep up with the rate of inflation in order to increase real purchasing power. In much the same way, rising inflation erodes the value of the principal on fixed income securities. In such condition their is Requirement of increase the required rate of return & Be more likely to define risk as variance of expected return.