Question
2. you are considering the purchase of a duplex. Effective gross income (EGI) during the first year of operations is expected to be $33,600 ($1,400
2. you are considering the purchase of a duplex. Effective gross income (EGI) during the first year of operations is expected to be $33,600 ($1,400 per month per unit). First-year operating expenses are expected to be $13,440 (40% of EGI). Ignore capital expenditures. The purchase price of the duplex is $200,000. If you purchase the duplex, you are planning to put $60,000 down (equity) and finance the remaining $140,000. The $140,000 will be in the form of a standard fixed-rate mortgage, with an 8 percent interest rate and a term of 30 years. Assume that payments will be made annually and there are no up-front financing costs.
a. What is the overall capitalization rate?
b. What is the effective gross income multiplier?
c. What is the equity dividend rate (the before-tax return on equity)?
d. What is the debt coverage ratio?
e. Assume the lender requires a minimum debt coverage ratio of 1.2. What is the largest loan that you could obtain if you decide you want to borrow more than $140,000?
Show your work.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started