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9. The NOI for a small income property is expected to be $150,000 for the first year. Financing will be based on a 1.2 DCR applied to the first year NOI, will have a 10 percent interest rate, and will be amortized over 20 years with monthly payments. The NOI will increase 3 percent per year after the first year. The investor expects to hold the property for five years. The resale price is estimated by applying a 9 percent terminal capitalization rate to the sixth-year NOI. Investors require a 12 percent rate of return on equity (equity yield rate) for this type of property. a. What is the present value of the equity interest in the property

Answer :

anthougo

Answer:

a. The present value of the equity interest in the property is:

= PV = $1,096,338

Explanation:

a) Data and Calculations:

Debt Coverage Ratio = 1.2

Debt interest = $150,000/1.2 = $125,000

Interest rate = 10%

Therefore, total financing or debt obtained = $125,000/10% = $1,250,000

NOI for the first year = $150,000

NOI for other years = 3% per year after the first year.

Holding period of property = 5 years

Therefore, expected NOIs for the second to fifth year are calculated as follows:

                 

Net operating income (NOI):

First Year  = $150,000      

Second Year = $154,500 ($150,000 * 1.03)

Third Year = $159,135 ($154,500 * 1.03)

Fourth Year = $163,909 ($159,135 * 1.03)    

Fifth Year = $168,826 ($163,909 * 1.03)

Sixth year NOI = $173,891 ($168,826 * 1.03)

Terminal capitalization rate = 9%

Resale price = NOI of the sixth year/Terminal cap rate

= $173,891/9% = $1,932,122

The present value of the equity interest in the property:

From an online financial calculator:

N (# of periods)  5

I/Y (Interest per year)  12

PMT (Periodic Payment)  0

FV (Future Value)  $1,932,122

Results

PV = $1,096,337.91

Total Interest $835,784.09

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