Financing and Financial Analysis

Financing

If we decide to invest in this property, we will take advantage of our leverage opportunities and obtain debt financing using a loan-to-value ratio of 70%, which is within the mortgage company’s requirements. Using the economic value approach and a 9% cap rate, our maximum principle loan amount will be $4,289,304. After speaking with the loan officer, the interest rate will be set at 5% annually. The residual capitalization rate was estimated by the current property manager at 10%. We intend to sell the property after 10 years for a profit. Selling costs and fees are estimated to be 3% of direct capitalization residual value of $23,872,787.

Acquistion Cost: $5,750,000

Interest Rate: 5%

Loan-to-Value: 70%

Discount Points: None

Holding Period: 10 years

Amortization Period: 30 years

Selling Costs: $716,184

Going-In Cap Rate: 9%

Residual Cap Rate: 10%

Financial Analysis

Initial information:

Rental rates are increasing at 2% every year. Vacancy and collection loss is 15.4011% of adjusted potential gross rent. We found operating expenses to currently be 69.971% of effective gross rent and increasing at 2% per year. 

First, we were able to construct a proforma statement through excel to forecast net operating income for every year in the holding period.

The debt service was found using excel by amortizing the debt over monthly payments for 30 years. We found the monthly debt service payment to be $23025.91 and the annual payment to be $276,311. By creating an amortization schedule, we were also able to find the remaining loan balance at the end of the holding period, as shown in the schedule below. 

Next, we calculated the discounted cash flows using excel as shown below.

If we had only used the direct capitalization method, we would have found that value at year 0 is $6,127,578 and value at the end of year 10 is $23,872,787.

Finally, using the discounted cash flows found above, we calculated the levered and unlevered net present value (NPV) and internal rate of return (IRR) to analyze the profitability of our investment. The results are shown below.

NPV levered: $7,382,373.91

IRR levered: 21%

NPV unlevered: $8,329,874.34

IRR unlevered: 39%

From this information, we have decided that the opportunity is profitable and will move to invest in the property.