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

First year Potential Gross Income $ 945,000

Operating Expense Ratio 38%

Vacancy Ratio	5%
Asking price	$5,434,000
Land value	$1,086,800
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 to 40%; Debt Coverage Ratio = 1.15 to 1.25 and Break Even Ratio = 0.80 to 0.9. The investor is in the 28% tax bracket and owns other income producing properties; thus, she could use passive losses generated by this project.

1. Calculate net operating income and the 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 value about right? Why or why not?
4. How might the financing be adjusted?