5. If you get a loan that corresponds to the largest annual loan payment the len

Question

5. If you get a loan that corresponds to the largest annual loan payment the lender will allow you to make based on the DSCR (computed in part 4), what will be your net income in the first year?

6. What is the largest loan a lender is willing to provide you with based on question 4? (Use the fact that this is an IO loan at 6.25%. Also use the loan payment from question 4.)

7. The seller’s asking price for the property is $7,000,000. If the lender has a maximum 70% LTV requirement what is the most the bank will lend you? (Only based on the LTV requirement.)

8. The loan must satisfy both the minimum DSCR of 1.2 and maximum LTV of 70%.

What is the biggest loan the borrower can get?

9. If you buy the property at the asking price of $7,000,000 using the biggest loan you can get (from question 8), what will your down payment be?

10. What is the annual mortgage payment on the loan in question 8?

11. If you buy the property at the asking price of $7,000,000, what will your ‘going in’ Cap Rate be?

12. If the annual irr for this property is 8.5%, then based on the cap rate in question 11, what does this imply is expected NOI growth rate for this property?

13. You do research and find that similar properties are selling at a 6% cap rate. Using a 6% cap rate, what price would you offer for this property?

14. Suppose you buy the property at the asking price of $7,000,000 and own it for exactly 1 year.

You make the down-payment in part (9).

You collect the NOI in part (3).

You make the annual mortgage payment in part (10).

In two years, the NOI is expected to be the same.
You sell the property at the end of year 1, at a cap rate of 50 basis points below the cap rate in part (11) and you pay off the loan balance when you sell.

Compute the IRR on this investment.

first four questions are answered :

1. PGI = 20,000 x 45 = 900,000

2. EGI=PGI vacancy collection =900,000 - 0.06*900,000 - 0.02*900,000 = 828,000

3. Operating Expenses = 0.40*828,000 = 331,200
NOI = EGI - Operating Expenses = 496,800

4. DSCR = NOI/Debt Service
1.2 = 496,800/Debt Service
Debt service = 496,800/1.2 = 414,000

5. If you get a loan that corresponds to the largest annual loan payment the lender will allow you to make based on the DSCR (computed in part 4), what will be your net income in the first year? 6. What is the largest loan a lender is willing to provide you with based on question 4? (Use the fact that this is an IO loan at 6.25%. Also use the loan payment from question 4.) 7. The seller’s asking price for the property is $7,000,000. If the lender has a maximum 70% LTV requirement what is the most the bank will lend you? (Only based on the LTV requirement.) 8. The loan must satisfy both the minimum DSCR of 1.2 and maximum LTV of 70%. What is the biggest loan the borrower can get? 9. If you buy the property at the asking price of $7,000,000 using the biggest loan you can get (from question 8), what will your down payment be? 10. What is the annual mortgage payment on the loan in question 8? 11. If you buy the property at the asking price of $7,000,000, what will your ‘going in’ Cap Rate be? 12. If the annual irr for this property is 8.5%, then based on the cap rate in question 11, what does this imply is expected NOI growth rate for this property? 13. You do research and find that similar properties are selling at a 6% cap rate. Using a 6% cap rate, what price would you offer for this property? 14. Suppose you buy the property at the asking price of $7,000,000 and own it for exactly 1 year. You make the down-payment in part (9). You collect the NOI in part (3). You make the annual mortgage payment in part (10). In two years, the NOI is expected to be the same. You sell the property at the end of year 1, at a cap rate of 50 basis points below the cap rate in part (11) and you pay off the loan balance when you sell. Compute the IRR on this investment.

Explanation / Answer

Based on the four parts provided by you -

5 Net Income = NOI - Debt service = 496800-414000 82800 6 The largest Loan = Debt service = Loan x interest rate 414000 = Loan x 6.25% loan = 414000/0.0625 6624000 7 Maximum loan should be 7000000 x 70% i.e. 7000000 x .70 = 4900000 8 Maximum loan to fulfil both requirements = Lower of (6) or (7) i.e. 6624000 or 4900000 it is 4900000 10 Down payment = excess value of property over loan i.e. 7000000 - 4900000 2100000 11 cap rate = NOI/ Po = 496800/7000000 7.0971% 12 Cap rate = IRR - G 7.0971 = 8.5 - g g = 8.5 - 7.0971 1.4029% 13 cap rate = NOI/ Po Po = NOI / Cap rate Po = 496800/ 0.06 8280000 14 Selling cap rate = 7.0971 - 0.50 = 6.5971428571428600% Price of property at year end 1 = NOI/Cap rate P1 = 496800/0.065971 7530532.7 If we discount cash flows at IRR , Then it will result in zero NPV Such that - Year Cash flow type Cash flows 0 Down payment(10) -2100000 1 Net Income(5) 82800 1 Loan Repayment(8) -4900000 1 Property sold 7530532.698 Let IRR = r ; Then -2100000 + {[82800 +7530532.698 - 4900000]/(1+r)} = 0 -2100000 + 2713333 /(1+r) = 0 1+r = 2713333/2100000 1.29206319 r= 29.2063% Please provide feedback…. Thanks in advance… :-)

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