Question

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?

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

Answer 2

The value of the debt coverage for the first year will be 1.17.

To calculate the debt coverage ratio, an individual has to decide the net operating income by the debt service.

• Net operating income = $117000

• Debt service = $99993.96

Therefore, the debt coverage ratio will be:

= Net operating income / Debt service

= 117000 / 99993.96

= 1.17

The debt coverage ratio is 1.17.

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