Question

2. A property was purchased by an investor. The property is expected to produce $120,000 of annual net operating income in year 1; increasing $10,000 every year thereafter. The owner intends to sell the property at the end of year 5.

a. Assuming the bank requires a 1.2 debt coverage service ratio based on the expected first year NOI, what is the maximum monthly mortgage payment?

b. Assuming the mortgage has a 6% annual interest rate, amortizes over 30 years, with monthly payments. What is the principal amount of mortgage?

c. Based on the above scenario, what is the expected NOI for purposes of computing the value of the asset at the time of sale?

d. What is the value of the asset assuming the property will sell at a terminal(exit)cap rate of 5%?

Answer 1

Solution

Debt Service Coverage ratio	Net operating income/Total debt service
All amount in $
1st year net operating income			120000
DSCR	1.2
Total debt payment in a year			Net operating income / total debt service
Annual Payment for mortgage			100000
Monthly Payment		8333.333333
Part 1 Answer
maximum monthly mortgage payment at the time of property acquisition					$ 8333
Mortgage time in year	30	nper	360
Monthly Payment(PMT)	8333
Interest(rate)	6%
Present value using formulae, PV(rate,nper,pmt)		$ 138883
Part 2 answer	$ 138883
3. Based on the above scenario, what is the expected NOI for purposes of computing the value of the asset at the time of sale?
Year	Income	Debt Payment	Net Income	Expected Value at the end of 5th year
1	1,20,000	100000	20,000	25249.54
2	1,30,000	100000	30,000	35730.48
3	1,40,000	100000	40,000	44944
4	1,40,000	100000	40,000	42400
5	1,40,000	100000	40,000	40000
	Net Income from Property at the time of time			188324
	of sale
4. What is the value of the asset assuming the property will sell at a terminal (exit) cap rate of 5%?
Property Value	138883
Terminal rate	0.05
Selling rate	property value/terminal value
	6944.15