Ch. 11 Underwriting Flashcards
What is the Equation for CAP?
NOI/PRICE
What is the Equation for C/C (cash on cash)
CFADS/DP
cash flow after debt services / down payment
What is the Equation for DCR? (debt coverage ratio)
NOI/ADS
net operating income divided by annual debt services
What is the Equation for LTV?
Loan Amount / Value
What is the Equation for Equity?
Value-Loan Balance
additionally closing costs
What is the Equation for ROE? (return on equity)
CFADS/Equity
cash flow after debt service divided by equity, which is also changing
What is the Equation for K? (loan constant)
ADS/Loan Amount
annual debt services divided by loan amount
How do you find Positive or Negative Leverage?
Positive Leverage: C/C > Cap
(cash on cash is greater than cap rate, there for meaning your returns will be greater with putting debt on the property)
Negative Leverage: C/C < Cap
(cash on cash is lesser than cap rate, there for meaning your returns will not be greater with putting debt on the property)
Not Good or Bad, its Positive vs Negative
Why are Rent Comps Important?
Rent comps are used to determine the current market rent potential. When valuing a property, buyers are not just looking at today’s income, they are looking at the durability of that income stream and opportunities to raise income of a given property.
At least 5 properties that compete for similar tenants is custom for rent comps.
Why are Sales Comps Important?
5 comparable properties are required. Allows you to show where properties recently sold for
It is smart to call other owners/sellers when looking at comps to know how the process was and aspects like what financing etc was involved.
Why are On Market Comps important?
Part of the proposal process identifies several similar properties that are currently on market. Our property will be competing with these for investor interest.
