You are an employee of University Consultants, Ltd., and have been given the following assignment. You are to present an investment analysis of a new small residential income-producing property for sale to a potential investor. The asking price for the property is $1,250,000; rents are estimated at $200,000 during the first year and are expected to grow at 3 percent per year thereafter. Vacancies and collection losses are expected to be 10 percent of rents. Operating expenses will be 35 percent of effective gross income. A fully amortizing 70 percent loan can be obtained at 11 percent interest for 30 years (total annual payments will be monthly payments * 12). The property is expected to appreciate in value at 3 percent per year and is expected to be owned for five years and then sold.

What is the first year debt coverage ratio?

Question

London Davila

Business

5 June, 02:54

You are an employee of University Consultants, Ltd., and have been given the following assignment. You are to present an investment analysis of a new small residential income-producing property for sale to a potential investor. The asking price for the property is $1,250,000; rents are estimated at $200,000 during the first year and are expected to grow at 3 percent per year thereafter. Vacancies and collection losses are expected to be 10 percent of rents. Operating expenses will be 35 percent of effective gross income. A fully amortizing 70 percent loan can be obtained at 11 percent interest for 30 years (total annual payments will be monthly payments * 12). The property is expected to appreciate in value at 3 percent per year and is expected to be owned for five years and then sold.

What is the first year debt coverage ratio?

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Answers (1)

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Kyle Kim · Answer 1

Answer: the debt coverage ratio is 1.09

Explanation:

To get the effective gross income:

Potential rent less vacant spaces:

200000-20000'=180000

' we were told this is 10% of the potential rent

We then deduct our operating costs:

180000-70000'=110000

' we were told this is 35% of the potential rent

Our amortization pmt is $100646,52 per annum:

Pv=875000 (This is 70% of 1250000) n=30 i=11 And FV=0

Therefore NOI/annual debt service

=110000/100646,52

= 1.0929

= 1.09 rounded of to two dec