REAL ESTATE HW 3 You are considering purchasing a small offi

REAL ESTATE HW #3 .You are considering purchasing a small office building for Q1. Calculate Going-in Cap Rate (Ro): 340,000 51,000 $1,975,000 Your expectations include 289,000 115,600 14,450 158,950 125,630 33,320 First-year gross potential income of $340,000; -Vacancy & collection losses equal to 15% of PGI; -Operating expenses-40% of EGI; -Capital expenditures-5% of EGI -$1,481.250 mortgage (7S% LTV) @ 7% - Mortgage will be amortized ower 25 years with a monthly OE CAPEX NOI Q2. Calculate the Equity Dividend Ratio (EDR): payment of $10,469.17 -Total up-front financing costs = 256 of the loan amount - Required equity inwestment is $523,375 1$1,975,000- BTCF ($1,481,250- $29,625) Complete Q1 - 05 using info above Q3. Calculate the Effective Gross Income Multiplier (EGIM): HW #3 You are considering purchasing a small office building for $1,975,000 Q4. Calculate the Operating Expense Ratio (OER): Your expectations include: -First-year gross potential income of $340,000 -vacancy & collection losses equal to 1S% of PGI; -Operating expenses 40% of EGI -Capital expenditures-S% of EGI -$1.481,250 mortgage (75% LT) @ 7% - Mortgage will be amortized over 25 years with a monthly payment of $10,469.17 -Total up-front financing costs = 2% of the loan amount - Required equity inwestment is $523,375 I$1,975,000- Q5. Calculate the Debt Coverage Ratio (DCR) ($1,431,250-$29,625)1

Solution

a) Going in Cap Rate = Projected net operating income /Purchase Price Going in Cap Rate = $158,950/$1,975,000 8.05% b) Equity Dividend Rate = BTECF / Equity investment Equity Dividend Rate = $33320/$523375 6.37% c) Effective gross Income Multiplier (EGIM) = MV/Effective Gross Income Effective gross Income Multiplier (EGIM) = $1,975,000/$289,000 6.83 Times d) Operating Expense Ratio = Operating Expense/ EGI Operating Expense Ratio = $115,600/$289,000 40.00% e) Debt Coverage Ratio = Net Operating Income / Debt Service Debt Coverage Ratio = $158950/ $125,630 1.27 times