Question

You borrow $75,000 for 30 years at 11% interest compounded annually. The value of the property is $100,000, PGI= $20,000, vacancy rates are 8%, and operating expenses are $8,100.

1. Calculate the mortgage constant.

2. Calculate the annual debt service.

3. Calculate the EGI, NOI, and BTCF

4. Calculate the overall capitalization rate, using the band-of-investment approach.

Answer 1

Annual Debt Service

Annual Debt Service = [P(r(1+r)^n)] / [(1+r)^n - 1]

where P = Principal

r = rate

n = number of period

Putting value in above formula

= [75000(0.11(1 + 0.11)^30)] / [((1 + 0.11)^30) - 1]

= 188861.4 / 21.8923 = $8626.85

Mortgage Constant

Mortgage Constant = Annual Debt Service / Loan amount

= 8626.85 / 75000 = 0.115025 * 100 = 11.5025%

EGI, NOI and BTCF

EGI = PGI - Vacancy = 20000 - (20000*8%) = 20000 - 1600= $18400

NOI = EGI - Operating expenses = 18400 - 8100 = $10300

BTCF = NOI - Debt service = 10300 - 8250 = $2050 (Only interest will be deducted)

Overall capitalization rate

Overall Capitalization rate = (Weight of equity * Cost of equity) + (Weight of Debt * Cost of debt)

Weight of equity = 25% = 0.25

Weight of Debt = 75% = 0.75

Cost of debt = 11%

But don't know the cost of equity.

If you put the values in formula you will get the overall capitalization rate