Horatio Ltd. wishes to purchase a rental apartment as part of its property portfolio. Gross rental income is expected to be $380 per week. Expenses would include council rates $1,300 per annum, utilities rates $850 per annum, maintenance $2030 per annum, body corporate fees $640 per annum, real estate agent fees $30 per week, and estimated stamp duty of $15,000. Rental returns and Horatio Ltd's. required rate of return are identical at 6.5%.
a) What is Horatio Ltd's. maximum willingness to pay for this property using the net capitalization method.
b) If Horatio Ltd. purchased this property for $220,000, what would its annual return be?