Real Estate Principles 3rd Edition by David Ling,Wayne Archer

Exercise 22

You are considering the purchase of an industrial warehouse. The purchase price is $1 million. You expect to hold the property for five years. You have decided to finance the acquisition with a $700,000 loan, 6 percent interest rate, 30-year term, and annual interest-only payments (that is, the annual payment will not include any amortization of principal). There are $50,000 in up-front financing costs. You estimate the following cash flows for the first year of operations:

a. Calculate the overall rate of return (or "going-in cap rate").
b. Calculate the debt coverage ratio.
c. What is the largest loan that you can obtain (holding the other terms constant) if the lender requires a debt service coverage ratio of at least 1.2