A property that can be purchased for $1.7 million has an expected first year NOI of...

A property that can be purchased for $1.7 million has an expected first year NOI of $190,000. An investor is considering two loan alternatives:

LOAN A:

A 70% loan-to-value ratio, with interest at 7.5% per annum. The loan will require level monthly payments to amortize the principle over 20 years.

LOAN B:

An 80% loan-to-value ratio, with interest at 8% per annum. This loan will require level monthly payments to amortize the principal over 25 years.

Fore each loan, determine:

A. The expected before-tax cash flow (NOI minus annual debt service) as a percentage of the equity investment.

Expert Solution

The calculation is as follows –

Particular	LOAN A	LOAN B
Purchase Price of Property	$1.7 million	$1.7 million
First Year NOI (NOI)	$190,000	$190,000
Loan-to-value ratio	70%	80%
Loan Amount	$1.19 million (i.e. 70% of 1.7 m)	$1.36 million (i.e. 80% of 1.7 m)
Equity Amount (Equity)	$0.51 m	$0.34 m
Payment frequency	Monthly	Monthly
No of months for repayment	240 (20yrs * 12)	300 (25yrs*12)
Interest Rate Monthly	7.5%/12	8%/12
In excel, formula used for calculating monthly payments	=PMT(rate, nper,pv) =PMT(7.5%/12, 240, 1.19)	=PMT(rate, nper,pv) =PMT(8%/12, 300,1.36)
Hence, Monthly debt servicing	$9,587	$10,497
Yearly Debt Servicing (Debt Service)	$115,039	$125,960
Ratio=(NOI – Debt Service)/Equity	=(190,000 – 115,039)/510,000 =14.7%%	=(190,000-125,960)/340,000 =18.8%%

jeff jeffy answered 2 years ago

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