Question

Given the following information provide an analysis that answers the questions at the end of the assignment.

Purchase Price: $4,250,000

Rents:

Tenant	Unit 1	Unit 2	Unit 3	Unit 4	Unit 5	Unit 6	Unit 7	Unit 8
Monthly Rent	$5,400	$5,400	$6,200	$3,500	$3,600	$3,300	$3,700	$3,100

Year 1 NOI: $248,678

NOI Growth Rate: 2.6%

Loan:

           LTV: 75%

           Amortization Period: 25 years, Term: 10 years

           Interest Rate: 3.35%

           Lender Points: 2%

Selling Costs: 3%

Going Out Cap Rate: 5.5%

Discount Rate: 10%

Questions:

1. What is the going in cap rate? 5.85%
2. What is year 1 PGI? $410,400
3. What is the DSCR?
4. What is your Initial Investment? $3,187,500
5. What is the sale price after the five-year hold? $3,272,500
6. What is the loan balance at sale? $977,500
7. What is the NPV for this project? $176,322
8. What id the IRR for this project? 33.33%
9. What is the DCF for this project?
10. What is the reversion amount?

The bolded answers are the ones I have so far but I believe they are wrong, can someone help and make sure if they are right too and help me answer the other questions as well?

Answer 1

1) Going-in Cap Rate = Property's projected first-year NOI / Purchase price of the property

                               = $248,678 / $4,250,000

                               = 5.85%

2) Potential Gross Income = Total rental income a property

= ($5,400 + $5,400 + $6,200 + $3,500 + $3,600 + $3,300 + $3,700 + $3,100) * 12

   = $34,200 * 12

    = $410,400

3)

DSCR = Net operating income / Total debt service

Net operating income = $248,678

Total debt service = [(Loan Amount * Interest Rate)] / [1 - (1 + Interest Rate / 12) ^{(12 * Loan Term)} )]

                           = [(Purchase Price* LTV) * (Interest Rate)] / [1 – (1 + Interest Rate / 12) ^{(12 * Loan Term)} ]

                           = [($4,250,000 * 0.75) * (0.0335) ]/ [1 – (1 + 0.0335/12)^{(12 * 10)}]

                           = [$3,187,500 * 0.0335] / [0.39728806931]

                           = $106,781.25 / 0.284327961

                           = $375,556.627018

DSCR = $248,678 / $375,556.627018

            = 0.66215

4)

Initial Investment = Purchase Price* LTV

                                   = $4,250,000 * 0.75

                        = $3,187,500

5)   

Amortisation amount for 5 years = (Purchase Price / Amortization Period) * 5

= $4,250,000/25*5

   = $850,000

Amortised value = Purchase Price - Amortisation amount for 5 years

= $4,250,000 - $850,000

= $3,400,00

Sale price after the five-year hold = Amortised value – (Purchase Price * Selling Costs)

          = $3,400,00 - (4,250,000 * 3%)

          = $3,272,500

6)   

Loan balance at sale = Purchase Price - Sale price after the five-year hold

                               = $4,250,000 - $3,272,500

                                        = $977,500

7)

NPV for this project = (Purchase Price * Discount Rate) - Net operating income

                                        = ($4,250,000 * 10%) - $248,678

                              = $425,000 - $248,678

                              = $176,322

8)

IRR for this project = (Purchase Price - Loan Amount) / Loan Amount

                               = ($4,250,000 - $3,187,500) / $3,187,500

                               = $1,062,500/ $3,187,500

                                = 0.33333

                                = 33.33%

9)

DCF for this project = Cash Flow / Discount Value

                                       = Net operating income / (1 + Discount Rate)^{Term Period}

                                       = $248,678 / (1 + 0.1)¹⁰

                              = $95,876.1341288

10)      

Reversion amount = Net operating income / Going Out Cap Rate

                                        = $248,678 / 0.055

                               = $4,521,418.18182