Question

Your building has been appraised at $2,000,000 using a cap rate of 10%. The lender is willing to provide you a 5-year mortgage loan with an LTV of 70%, an amortization period of 25 years and a mortgage interest rate of 7%. What will be your DSCR?

a. 1.9

b. 1.5

c. 0.7

d. 1.4

e. 1.7

Answer 1

Solution:

we know that,

cap rate=Net operating income/Property value

thus,net operating income

=Cap rate*Property value

=10%*$2000,000

=$200,000

Amount of loan=70% of $2000,000

=$1400,000

Now we have to calculate annual payment against loan(Debt service)

Formula;

P=r(PV)/1-(1+r)-n

where,

P=annual payment

r=rate per period

PV=Principal amount of loan

n=number of periods

thus,

P=7%($1400,000)/1-(1+7%)-25

P=.07($1400,000)/1-(1+.07)-25

P=$98000/(1-.18425)

=$98000/.81575

=$120,134.85

Thus debt service is $120,134.85

Now,

Debt service coverage ratio=Net operating income/debt service

=  $200,000/$120,134.85

=1.665 times

=1.7 times

Thus,the answer will be option 'e' (ie. 1.7)