Question
Consider a property with a starting value of $3.2 million.The bank is offering an accrual loan based on a 75% LTV target.Assume a pay rate
Consider a property with a starting value of $3.2 million.The bank is offering an accrual loan based on a 75% LTV target.Assume a pay rate of 2.5% on a 30 year amortization and an accrual rate of 7% annually.The loan comes due in 42 months.
a.What is the LTV at maturity if the value of the property increases at 0.5% per month?
b.Explain why placing an accrual loan on a property leads to a higher levered IRR for the investor, vs. an interest-only or fully-amortizing loan with the same 7% interest rate?
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Principles of Managerial Finance
Authors: Lawrence J. Gitman, Chad J. Zutter, Wajeeh Elali, Amer Al Roubaix
Arab World Edition
1408271583, 978-1408271582
