Question

In: Finance

You are seeking financing for a $500,000 investment in an apartment building. The NOI in the...

You are seeking financing for a $500,000 investment in an apartment building. The NOI in the first year is projected to be $35,000. The bank is willing to underwrite a fully-amortizing, 30 year fixed rate mortgage with constant monthly payments at an interest rate of 6%, compounded monthly.

Please note the following ratio:


Debt Coverage Ratio= Net Operating Income/ Annual Debt Service

Compute the Debt Coverage Ratio if the bank underwrites a mortgage at a Loan-to-Value Ratio of 75%.

Solutions

Expert Solution

Given information : Investment value = 500000 , Net operating income= 35000 ,

Loan terms = 75% LTV, No of periods = 30 x 12= 360 months, rate = 6%, Periodic rate=6/12= 0.50%

1. Calculate the Monthly Installement. Loan amount = 500000 x 0.75 =375000

Loan Amount = Monthly payment x cumulative discounting factor @0.5% for 360 periods.

[ For pv factor use discounting tables] Otherwise long period questions can be calculated on financial calculator.

Put values in texas ba 2 in TVM as, N=360, I/Y=0.5, PV= 375000, FV=0 Compute PMT = 2248.3145

2. Calculate Annual debt repayment = 2248.3145 x 12 =26979.77

3. Debt Coverage ratio = Net Operating Income / Annual debt service

= 35000 / 26979.77

= 1.29726829

Debt coverage ratio = 1.30 approx

jeff jeffy answered 2 years ago
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