Homework #4

Name

Institutional Affiliation

Course

Professor

Date
 QUESTION 1

Annual Salary: $150,000

Annual Taxes: $10,000

Annual Home Insurance: $2,000

Annual Salary−(Annual Taxes+ Annual Home Insurance)

Monthly Net Income =
12

150,000−(10,000+2,000)
Monthly Net Income = = $11,500
12

Available Monthly Income = Monthly Net Income − (Monthly Car Loan + Monthly Student

Loan + Monthly Credit Card Payments)

Available Monthly Income = 11,500 − (500 + 1,000 +6 00) = $9,400

Annual Salary 150,000

Gross Monthly Income = = = $12,500
12 12

Max Housing Expense = 0.43 × Gross Monthly Income

Max Housing Expense = 0.43 × 12,500 = $5,375

Annual Taxes 10000

Monthly Property Taxes = = = $833.33
12 12

Annual Home Insurance 2,000

Monthly Home Insurance = = = $166.67
12 12
 p
Maximum Loan Amount . PV = r
−n
1−(1+r )

6.75 %
r= = 0.005625
12

n = 30 × 12 = 360

4,375
Maximum Loan Amount . PV = 0.005625 = $674,532
−360
1−(1+r 0.005625)

Maximum Loan Amount

Price of Home =
1−Down Payment Percentage

674,532
Price of Home = = $843,165
0.80

QUESTION 2

Comparable 1 Adjustments

Original Sale Price: $875,000

 Age: The house is 29 years older than the subject. So, the adjustment for age is

29 years × − $2,000/year = + $58,000

 Size: The house is 250 sq ft larger than the subject.

250 sq ft × $3,000/sq ft = - $750,000

 Acreage: The house has 0.2 more acres than the subject.
 0.2 acres × $125,000/acre = - $25,000

 The adjustment for street is:

- $50,000

 The adjustment for pool is;

- $40,000

Adjusted price for Comparable 1 = $875,000 - $75,000 - $25,000 - $50,000 - $40,000 + $58,000

= $743,000

Comparable 2 Adjustments

Original Sale Price: $700,000

 Age: 5 years older than the subject;

5 years × − $2,000/year = + $10,000

 Size: 200 sq ft smaller than the subject.

−200 sq ft × $3,000/sq ft = + $600,000

 Acreage: 0.1 acre less than the subject

− 0.1 acres × $125,000/acre = + $12,500

 Pool:

- $40,000

Adjusted price for Comparable 2 = $700,000 + $60,000 + $12,500 - $40,000 + $10,000 =

$742,500

Comparable 3 Adjustments

Original Sale Price: $690,000

  Age: 5 years newer than the subject

5 years × $2,000/year = - $10,000

 Acreage: 0.5 acre less than the subject;

−0.5 acres × $125,000/acre = + $62,500

Adjusted price for Comparable 3 = $690,000 + $62,500 - $10,000 = $742,500

Comp 1 Adjusted +Comp 2 Adjusted +Comp 3 Adjusted

Estimated Market Value =
3

$ 743,000+ $ 742,500+ $ 742,500

Estimated Market Value = = $742,667
3

QUESTION 3

Year1: = $500,000 × 1.5% = $7,500

Year 2: Rate adjusts to 1.5%+2% = 3.5% = $500,000×3.5% = $17,500

Year 3: Rate adjusts to 3.5%+2% = 5.5% = $500,000 × 5.5% = $27,500

Year 4: Rate adjusts to 5.5% + 2% = 7.5% = $500,000 × 7.5% = $37,500

Year 5: Rate adjusts to 9.0%, but capped at the lifetime cap of 7.5%

Year 5 = $500,000 × 7.5% = $37,500

Total Interest Paid Over Five Years = $7,500 + $17,500 + $27,500 + $37,500 + $37,500

Total Interest Paid Over Five Years = $127,500

 QUESTION 4

Potential Gross Income (PGI) = $10,300,000

Vacancy Amount = PGI × 0.10 = $10,300,000 × 0.10 = $1,030,000

Effective Gross Income (EGI) = PGI−Vacancy Amount= $10,300,000−$1,030,000 = $9,270,000

Operating Expenses = EGI × 0.35 = $9,270,000 × 0.35 = $3,244,500

Net Operating Income (NOI) = EGI − Operating Expenses =$9,270,000−$3,244,500=$6,025,500

 Capitalization Rate (Cap Rate) at 7%:

NOI $ 6,025,500
Value = = = $86,078,571
Cap Rate 0.07

 Potential Gross Income Multiplier (PGIM) at 8.25x:

Value = PGI × PGIM = $10,300,000 × 8.25 = $84,975,000

 Effective Gross Income Multiplier (EGIM) at 9.25x:

Value = EGI × EGIM = $9,270,000 × 9.25 = $85,747,500

 Loan Amount: 75% of property value (using the Cap Rate valuation)

Loan Amount = 0.75 × $86,078,571 = $64,558,928

 Annual Debt Service

Annual Debt Service:Annual Debt Service = 12×Monthly Payment = $4,398,702

Cash on Cash Return

NOI −Annual Debt Service 6,025,500−4,398 ,70

 Cash on Cash Return = x 100 = x 100
Equity Investment 21,519,643

= 7.56%

Debt Service Coverage Ratio (DSCR):

NOI 6,025,500
 DSCR = = 1.37
Annual Debt S ervice 4,398,702

Break-Even Ratio (BER):

Operating Expenses + Annual Debt Service ¿

 BER = = 3,244,500+ 4,398,702 ¿= 82.45%
EGI

Debt Yield:

NOI 6,025,500
 Debt Yield = × 100 = = 9.33%
Loan Amount 64,558,928