An investment opportunity having a market price of $1,000,000 is available. You could obtain a $750,000, 25-year mortgage loan requiring equal monthly payments with interest at 7.0 percent. The following operating results are expected during the first year.
Effective gross income $200,000
Less operating expenses and CAPX $100,000
Net operating income $100,000
For the first year only, determine the:
- Gross income multiplier
- Operating expense ratio (including CAPX
- Monthly and annual payment
- Debt coverage ratio
- Overall capitalization rate
- Equity dividend rate
- Gross income multiplier
Solution: Market price / Effective gross income = $1,000,000 / $200,000 = 5.0
- Operating expense ratio (including CAPX)
Solution: Operating expenses / Effective gross income = $100,000 / $200,000 = 0.50 or 50 percent.
- Monthly and annual payment
Solution: Monthly payment is $5,300.84. Annual payment is $63,610.13
- Debt coverage ratio
Solution: NOI / Annual debt service = $100,000 / $63,610 = 1.57
- Overall capitalization rate
Solution: NOI / Market price = $100,000 / $1,000,000 = 10 percent
- Equity dividend rate
Solution: Before-tax cash flow / Equity = $36,390 / $250,000 = 14.6 percent
Note: Equity investment = Acquisition price – loan amount
= $1,000,000 – $750,000
