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You are interested in purchasing an apartment complex for $2,000,000 that has Net Operating Income (NOI)...

You are interested in purchasing an apartment complex for $2,000,000 that has Net Operating Income (NOI) of $120,000 and is financed with an 80% LTV mortgage at 4%

1. What is the Cap Rate?

2. What is the ROA?

3. What is the leverage ratio?

4. Approximate the ROE

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Answer:

Cap Rate = Net operating Income / Current market value of property

Cap rate: 120000 / 2000000 = .06

Cap rate = 6%

Loan = 2000000 * 80% = $1600000

Interest on loan: 1600000 * 4% = $64000

Net Income = Net operating income - Interest

Net income: 120000 - 64000 = $56000

ROA = Net Income / Current value of asset

ROA: (56000 / 2000000 ) *100 = 2.8%

Leverage ratio = Loan amount / Property value

Leverage ratio: 1600000 / 2000000 = .8 or 80%

Purchase price of apartment complex = $2,000,000

LTV = 80%

Loan Value = Purchase price of apartment complex * 80%

= $2,000,000 * 80%

= $1,600,000

Down Payment = Equity = Purchase price - Loan Value

= $2,000,000 - $1,600,000

= $400,000

Approximate Return on Equity (ROE) = Net Operating Income / Equity Value

= $120,000 / $400,000

= 0.3

= 30%

jeff jeffy answered 1 year ago

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