Real Estate Financial Analysis
Lesson 4: Mortgage Calculations and Decisions
Lesson 5: Ratios
Homework Assignment Due Monday April 14, 2014 11:59pm EST
1) Why does the Lender’s yield differ from effective borrowing cost (EBC)? (5 points)
Answer: Lender’s yield differs from effective borrowing costs (EBC) because EBC accounts for additional up-front expenses that lender’s yield does not.
2) On the following loan, what is the best estimate of the effective borrowing cost if the loan is prepaid six years after origination? (10 points)
Interest rate: 7 percent
Term: 180 months
Up-front costs: 7 percent of loan amount
Answer: The best estimate of EBC is 8.7%
3) Calculate the original loan size of a fixed-payment mortgage if the monthly payment is
$1,146.78, the annual interest is 8.0%, and the original loan term is 15 years. (5 points)
Answer: Using financial ...view middle of the document...
5) Assume a retail shopping center can be purchased for $5.5 million. The center’s first year NOI is expected to be $489,500. A $4,000,000 loan has been requested. The loan carries a 9.25 percent fixed contract rate, amortized monthly over 25 years with a 7-year term. What will be the property’s (annual) debt coverage ratio in the first year of operations? (10 Points)
Answer: $489,500 / ($4,000,000 x 10.277%) = 1.19
6) You are considering purchasing an office building for $2,500,000. You expect the potential gross income (PGI) in the first year to be $450,000; vacancy and collection losses to be 9 percent of PGI; and operating expenses and capital expenditures to be 38 percent and 4 percent, respectively, of effective gross income (EGI).
What is the implied first-year overall capitalization rate? (5 Points)
What is the effective gross income multiplier? (5 Points)
7) You are considering the purchase of a quadruplex apartment building. Effective gross income (EGI) during the first year of operations is expected to be $33,600 ($700 per month per unit). First-year operating expenses are expected to be $13,440 (at 40 percent of EGI). Ignore capital expenditures. The purchase price of the quadruplex is $200,000.
The acquisition will be financed with $60,000 in equity and a $140,000 standard fixed-rate mortgage. The interest rate on the debt financing is eight percent and the loan term is 30 years. Assume, for simplicity, that payments will be made annually and that there are no up-front financing costs. (40 Points)
What is the overall cap rate?
NOI = $33,600 – $13,440 = $20,160
Cap Rate = NOI / Market price = $20,160 / $200,000 = 10.08%
What is the Equity Dividend Rate?
Before-tax cash flow = $20,160 - $12,436 = $7,724
Equity dividend rate = $7,724 / $60,000 = 12.87%
What is the Debt Coverage Ratio?
DCR= $20,160 / $12,436 = 1.62
What is the Debt Yield?
Debt Yield = $20,160 / $140,000 = 14.4%