Part B - Levered

As part of your due diligence, you connected with your loan officer. they can offer you a loan at a 5.50% interest rate, a 75% loan-to-value, with monthly payments calculated based on a 25-year amortization period. You would also be expected to buy down 1 point(s) of the loan amount to secure that interest rate. Your broker also told you that you should budget an additional $4,000 for other closing costs.

Part B - Questions

B1. Considering the data above, how much cash should you budget to make this investment?

B2. What is your expected annual debt service payment?

B3. What is your equity dividend rate in year 1?

B4. What is your before-tax cash flow in year 3?

B5. If your lender stipulated that you must maintain a debt coverage ratio of at least 1.25, is your expected NOI cash flow in year 1 sufficient to maintain this?

B6. At the end of five years, how much will you still owe on the mortgage?

B7. What is your effective cost of borrowing if you sell the property and pay off the loan at the end of year 5?

B8. Assuming that your investment criteria are such that you need 9.00% on your equity investment, what is the leveraged net present value (NPV)?

B9. What is the leveraged internal rate of return (IRR)?

B10. Suppose you decide not to sell your property and instead, refinance your loan balance at the end of year 5. Could you maintain your lender's debt coverage ratio of 1.25 in year 6 if interest rates increase by 300 basis points, all other terms being equal?