Question

Use the following information to create a 1-year cash flow and calculate the following metrics:

LTV, DSCR, DY, Breakeven point, Going in Cap Rate and Cash on Cash return

Total Acquisition Price is $1,056,000

•Property consists of eight office suites, Three on the first floor and five on the second floor

•Contract rents are: two suites at $1,800/mo, one at $3,600/mo and five at $1,560/mo

•Vacancy and collection losses are 10% per year

•Operating expenses are 40% of EGI

•CapEx are 5% of EGI

•First mortgage loan is $792,000

•Annual mortgage rate is 6.5%

•Loan amortization is 30 years

•Total up-front financing cost are 3% of loan amount

Answer 1

Total Acquisition Price is $1,056,000
Property consists of eight office suites
Contract rents are:
two suites at $1,800/mo = 2x$1,800x12 = $43,200
one at $3,600/mo = 1x$3,600x12 = $43,200
five at $1,560/mo = 5x$1,560x12 = $93,600
Total = $43,200 + $43,200 + $93,600 = $180,000

Vacancy and collection losses = 10%
= 10% x $180,000 = $18,000

EGI = $180,000 - $18,000 = $162,000

Operating expenses are 40% of EGI
= 40% x $162,000 = $64,800
CapEx are 5% of EGI
= 5% x $162,000 = $8,100

Mortgage loan is $792,000
Annual mortgage rate is 6.5%
Loan amortization is 30 years
EMI = PMT
FV = 0
PV = $792,000
I/Y = 6.5%
N = 30
So, PMT = $60,649.33

Total up-front financing cost are 3% of loan amount
= 3% x $792,000 = $23,760

Therefore, 1 Year Cash Flow =
Total Contract rents - Vacancy and collection losses - Operating expenses - Cap Ex - EMI - financing cost
= $180,000 - $18,000 - $64,800 - $8,100 - $60,649.33 - $23,760
= $4,690.67

LTV = Mortgage Amount / Property Value
= $792,000 + $23,760 / $1,056,000
= 75%

DSCR = Total Debt Service / Net Operating Income

where:
Net Operating Income = Revenue − Operating Expenses
Net Operating Income = $180,000 - $18,000 - $64,800 = $97,200

DSCR = $792,000 / $97,200 = 8.15

DY = Net Operating Income / Loan Amount
= $97,200 / $792,000 = 0.12

Break Even Point = Fixed Cost / Income - Expenses
= $60,649.33 / $180,000 - $18,000 - $64,800 - $8,100
= $60,649.33 / $89,100
= 68.07%

Going in Cap rate = Net Operating Income / Acquisition price
= $97,200 / $1,056,000
= 9.20%

Cash on Cash Return = Annual Cash Flow / Total Cash Invested
Total cash invested = Down payment + Fees
= ($1,056,000 - $792,000) + $23,760
= $287,760

Annual Cash Flow = Annual rent – Mortgage payments
= $180,000 - $18,000 - $64,800 - $8,100 - $60,649.33
= $28,450.67

Cash on Cash Return = $28,450.67 / $287,760
= 9.89%