Question

You plan to buy an apartment building and your cap rate is 5%. The building currently produces $144,928 in annual income and it is expected to grow 3.5% per year. How much should you pay for the property?





What happens if the cap rate changes to 8%? Does the value of the property go up or down?

Answer 1

1]	The value of the property is the PV of the growing
	perpetuity, that is the annual income which grows
	at 3.5% per year, when discounted at the cap rate
	of 5%.
	Value of the property [amount that can be paid) = 144928*1.035/(0.05-0.035) =	$ 1,00,00,032
2]	Value of the property when the cap rate changes to 8% = 144928*1.035/(0.08-0.035) =	$          33,33,344
	The value of the property goes down by 10000032-3333344 =	$ -66,66,688