Question

You are interested in purchasing an apartment complex for $2,000,000 that has Net Operating Income (NOI)...

You are interested in purchasing an apartment complex for $2,000,000 that has Net Operating Income (NOI) of $120,000 and is financed with an 80% LTV mortgage at 4%

A. What is the Cap Rate?

B. What is the ROA?

C. What is the leverage ratio?

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Answer #1

Answer(a): Cap Rate = Net operating Income / Current market value of property

Cap rate: 120000 / 2000000 = .06

Cap rate =  6%

Answer(b): Loan = 2000000 * 80% = $1600000

Interest on loan: 1600000 * 4% = $64000

Net Income = Net operating income - Interest

Net income: 120000 - 64000 = $56000

ROA = Net Income / Current value of asset

ROA: (56000 / 2000000 ) *100 = 2.8%

Answer(c): Leverage ratio = Loan amount / Property value

Leverage ratio: 1600000 / 2000000 = .8 or 80%

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