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%.

Answer 1

Answer : Debt yield ratio = 13.56%

Calculation :

Debt Yield ratio = (Net operating Income / Debt) * 100

where,

Net Operating Income =

Rent Income ( 1500 * 12 * 25) = 450000

Less :Operating expenses = 55000

Less :Expeceted vacancy anc collection loss = 50000

Add : Additional Income = 7500

So, Net Operating Income = 352500

* In calculating Net operating Income we do not take expenses like tax & interest.

Amount of debt = 3250000 * 80% = 2600000

So, Debt Yield Ratio = (352500 / 2600000) * 100

= 13.56 %