5. Consider the following facts about a residential real estate investment:

First year Potential Gross Income	$ 236,000
Operating Expense Ratio	38%
Vacancy Ratio	5%
Asking price	$1,300,000
Acquisition Costs (4% of price)	$52,000
Land value (25% of property value)	$ 325,000
Overall capitalization rate	11%
Financing:	FRM 12%, 20 years, 3 points

The lender is willing to finance up to 75% of the asking price and uses the following criteria: Vacancy Ratio= 5%; Operating Expense Ratio=35-40%; Debt Coverage Ratio = 1.15 to 1.25 and Break Even Ratio = 0.80-0.9.

1. Calculate the net operating income and before-tax cash flows from operations in the first year.
2. Calculate four relevant financial ratios: Capitalization Ratio (cap rate), Debt Coverage Ratio, Breakeven Ratio, and Equity Dividend Rate.
3. Is the investor getting a good deal? In other words, is the asking price reasonable? Why or why not?
4. Discuss whether this is a good loan for the lender. Hint: consider whether the loan meets the lenders underwriting criteria.