CFA Level I · CFA Level I Exam · Real Estate and Infrastructure
A private property is purchased for 10.0 million. During the year it earns net operating income of 0.60 million and its appraised value rises to 10.3 million. Ignoring financing and capital expenditure, the total return for the year is closest to:
The total return is about 9.0%. Income return is 0.60 divided by 10.0, or 6.0%, and appreciation is 0.30 divided by 10.0, or 3.0%. Adding the two gives 9.0%. Counting only income or only appreciation understates the return.
- A3.0%
- B6.0%
- C9.0%Correct
Explanation
Income return = 0.60/10.0 = 6.0%. Capital appreciation = 0.30/10.0 = 3.0%. Total return = 9.0%. Check: (0.60+0.30)/10.0 = 9.0%. Choosing 6.0% omits appreciation and 3.0% omits income.
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