You are considering investing in real estate—both for the short-term cash flows and the potential long-term capital gains—and are evaluating both a commercial lease property (such as a strip shopping center or an office building) and a residential rental property (such as several rental houses or a small apartment complex). It is likely that you will invest in only one of these properties at this time.

The general data regarding these investments is as follows:

Property type	Price	Mortgage	Expected		Estimated
			Rental income	Depreciation expense	resale
			(per year)	(per year)	value
Strip shopping center	$800,000	$448,000	$136,016	$7,692	$912,000
Small apartment complex	$650,000	$292,500	$91,281	$8,273	$685,100

The first potential investment consists of a seven-store shopping center, which has a current market price of $800,000. Of this amount, $200,000 represents the cost of the land, and the balance, $600,000, is attributable to buildings on the property. The second possible investment, which costs $650,000, consists of a small four-unit apartment complex. $195,000 of the investment's total price reflects the cost of land, and the remaining $455,000 is associated with structures on the land. For both properties, you believe you can increase the rents 2% per year for each of the next four years, and expect to sell either property at the end of that time. You desire a return of 7% on your investments.

One of the more important considerations associated with your investment is a property’s potential for generating a positive cash flow. One indicator of a property’s likelihood of generating positive cash flow is the property’s rental yield. The best formula for computing a property’s rental yield is: Check all that apply.

Rental yield (%) = [(Monthly rent / 2) / Purchase price] x 100

Rental yield (%) = [Annual rent / (Purchase price / 2)] x 100

Rental yield (%) = [((Monthly rent * 12) / 2) / Purchase price] x 100

In the equations above, the reason that the values are divided by two is that it is assumed that (half,one-quarter,one-third,200%) of the (rental income,purchase price) is spent on expenses other than debt repayment.

The rental yield expected on the commercial property is (8.5010%, 5.1006%, 10.2012%, 6.8008%) while the expected yield on the residential property is (7.0216%, 5.1673%, 9.8302%, 8.4259%) Based on their respective rental yields, the (Shopping center, apartment complex) is a better investment.

Another indicator of their relative attractiveness as an investment in each property’s price-to-rent ratio. The shopping center has a price-to-rent ratio of (5.8817, 8.7641, 4.7788, 104.0042) while the corresponding ratio for the apartment complex is( 7.1209, 4.7788, 78.5688, 8.7641) Based on this data, the (shopping center, apartment complex) is a better investment. From an investor’s perspective, a negative conclusion associated with an overly large ratio is that it suggests that property prices are very( high, low). Similarly, a discouraging explanation for an overly (small, large) ratio is that rents and market prices are so close in value that a financially astute investor would rather( rent than purchase, purchase than rent) a given property.

The loan-to-value (LTV) for the shopping center is ( 0.5600, 0.45500, 0.3656, 0.6892), but is (0.6892, 0.5600, 0.3656, 0.4500) for the apartment complex.

 

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The best formula for computing a propertys rental yield is Rental yield Annual rent Purchase price 2 ... View the full answer