You are an employee of University Consultants, Ltd., and have been given the following assignment. You are to present an investment analysis of a new small residential income-producing property for sale to a potential investor. The asking price for the property is $1,250,000; rents are estimated at $200,000 during the first year and are expected to grow at 3 percent per year thereafter. Vacancies and collection losses are expected to be 10 percent of rents. Operating expenses will be 35 percent of effective gross income. A fully amortizing 70 percent loan can be obtained at 11 percent interest for 30 years (total annual payments will be monthly payments *12). The property is expected to appreciate in value at 3 percent per year and is expected to be owned for five years and then sold.

Task 1: Concepts and techniques important in the analysis of real estate income property

(a) What is the first-year debt coverage ratio?

(b) What is the terminal capitalization rate?

(c) What is the investors expected before-tax internal rate of return on equity invested (BTIRR)?

(d) What is the NPV using a 14 percent discount rate? What does this mean?