What is the estimated value of an apartment building expected to produce a net annual income of $20,000 if the owner expects an 8% return on investment?

To determine the estimated value of the apartment building based on the expected net annual income and the desired return on investment, we can use the formula for calculating property value based on income:

Property Value = Net Income / Rate of Return

In this scenario, the net annual income is $20,000, and the owner expects an 8% return on investment, which can also be expressed as 0.08 in decimal form.

Using the formula:

Property Value = $20,000 / 0.08

Calculating this gives:

Property Value = $250,000

This means that in order to achieve an 8% return on an investment, the apartment building would need to be valued at $250,000. This method of valuing property is commonly used in real estate to assess the worth of income-producing properties, as it directly relates the income generated to the expected return desired by the investor. Thus, the estimation of $250,000 is the result of applying a fundamental real estate principle regarding income capitalization.