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17 August, 05:46

You are an employee of University Consultants, Ltd., and have been given the following assignment. You are to present an investment analysis of a new small residential income-producing property for sale to a potential investor. The asking price for the property is $1,250,000; rents are estimated at $200,000 during the first year and are expected to grow at 3 percent per year thereafter. Vacancies and collection losses are expected to be 10 percent of rents. Operating expenses will be 35 percent of effective gross income. A fully amortizing 70 percent loan can be obtained at 11 percent interest for 30 years (total annual payments will be monthly payments * 12). The property is expected to appreciate in value at 3 percent per year and is expected to be owned for five years and then sold.

What is the first year debt coverage ratio?

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  1. 17 August, 07:15
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    Answer: the debt coverage ratio is 1.09

    Explanation:

    To get the effective gross income:

    Potential rent less vacant spaces:

    200000-20000'=180000

    ' we were told this is 10% of the potential rent

    We then deduct our operating costs:

    180000-70000'=110000

    ' we were told this is 35% of the potential rent

    Our amortization pmt is $100646,52 per annum:

    Pv=875000 (This is 70% of 1250000) n=30 i=11 And FV=0

    Therefore NOI/annual debt service

    =110000/100646,52

    = 1.0929

    = 1.09 rounded of to two dec
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