Question

Jordan was receiving rental payments of $4,000 at the beginning of every month from the tenants of her commercial property. What would be the value of her property in the market if she wants to sell it, assuming a market capitalization rate of 5.25% compounded annually?

Answer 1

Effective Interest Rate or EAR = [{1+(APR/n)}^n]-1

Where, APR = Annual Interest Rate or Nominal Rate, n = Number of times compounded in a year

For Monthly,

0.0525 = [(1+i)^12]-1

1.0525 = (1+i)^12

Monthly Interest Rate = i = (1.0525^1/12)-1 = 0.004273

Value of Property = Present Value of PERPETUAL Rental Payments + Monthly Rent(Today's Rent, because it is received at BEGINNING of every month}

= [Rental Peyment/Monthly Rate]+Rental Payment

= [4000/0.004273]+4000

= 936082.47+4000

= $940082.47