12 Jul DEBT COVERAGE RATIO.
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 the $700000 loan 10 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 no up-front financing costs. You estimate the following cash flows for the first year of operations:$135000 Effective gross income27000 Operating expenses$108000 NOIa. Calculate the overall rate of return (or 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?
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