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The NOI for a small income property is expected to be $150,000 at the end of the first year. Financing will be based on a 1.2 DCR (debt coverage ratio) applied to the end of 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?
(b) What is the total present value of the property (mortgage (debt) and equity)?
Please show your calculations!

Sagot :

Present value of cash flow to equity is 674,383.47 and total present value of the property (mortgage (debt) and equity) is 1,753,806.58.

Give a brief account on Net Operating Income (NOI).

The profitability of real estate assets that produce income is evaluated using a formula known as net operating income (NOI). NOI is the total revenue from the asset less all running costs that are deemed to be absolutely required. The term "net operating income" (NOI) refers to a before-tax figure that leaves out loan principal and interest payments, capital expenses, depreciation, and amortization on a property's income and cash flow statement. The term "EBIT," which stands for "profits before interest and taxes," is used when this metric is applied to other industries.

To solve the question :

Particulars                        Formula                                    Value ($)

Loan Payment-------------------NOI/DCR-----------------------150,000/1.20=125,000

PV of NOI----------------------PV (10% ÷ 12,240,-125,000/12)--------1,079,423.11

FV of NOI

for 5 years---------------------FV (10% ÷ 12,60,-125,000/12,0--------954,634.88

Projected NOI for 5 years :

Year      NOI                           Loan Payment  Cash flow to equity

           (increasing at 3%)         ($)

1.     150,000                            125,000     150,000-125,000= 25,000

2.    150,000×1.03

     = 154,500                           125,000      154,500-125,000= 29,500

3.   154,500 ×1.03

     = 159,135                           125,000      159,135-125,000= 34,135

4   159,135 × 1.03

    = 163,909.05                   125,000       163,909.05-125,000 = 38,909.05

5 163,909.05 × 1.03

    = 168,826.32                   125,000 168,826.32-125,000 = 43,826.32

6 168,826.32 × 1.03

  = 173,891.11 (Resale value)           -                              -

Particulars        Formula                                    Value ($)

Cash flow     Future value of

from resale (Resale- Loan balance)   173,891/0.09- 954,634.88 = 977,487.34

PV of cash flow to equity :

Year     Cash flow       PVF at 12percent         PV of cash flow to equity

           to equity ($) = 1 / (1.12) ^ n.  

1   25,000                     0.892857                25,000 × 0.892857 = 22,321.43

2   29,500                     0.797194                29,500 × 0.797194 = 23,517.22

3    34,135                      0.71178                34,135 × 0.71178 = 24,296.62

4   38,909.05                0.635518             38,909.05 × 0.635518 = 24,727.40

5 43,826.32

      + 977,487.34

     = 1,021,313.66         0.567427 1,021,313.66 × 0.567427= 579,520.80

Total -                       -                                              674,383.47

Particulars                        Formula                          Value

Total Present Value PV of cash flow to equity      674,383.47

                                       + PV of loan                      + 1,079,423.11

                                                                                    = 1,753,806.58

Hence, 1,753,806.58 is the Total Present Value.

To know more about, NOI, visit :

https://brainly.com/question/28524695

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