Question

You are considering the purchase of an apartment building that has 25 units that can be rented out at $1,500 per month. You have estimated operating expenses and expected vacancy and collection losses for the first year to be $55,000 and $50,000, respectively. You also have estimated that you will be able to generate an additional $7,500 in the first year from garage rentals on the property. If the expected purchase price of the property is $3,250,000 and you are planning on making a 20% down payment, calculate the debt yield ratio assuming the interest rate is 6%.

choose one

a) 10.8%

b) 13.80%

c) 30.20%

d) 9.9%

Answer 1

Debt Yield Ratio = Net Operating Income/Value of property

- Value of property = $ 3250,000

Net Operating Income = Potential Rental Income + Other Income - Vacancy and collection losses - Operating expenses

= (25 units*$1500 per months*12 months) + $7500 - $50,000 - $55,000

= $ 352,500

Debt Yield Ratio = $ 352,500/3250,000

= 10.846%

hence, Option A

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