chapter 18: Investment Decisions: Ratios

Question 1

Net Operating Income equation

Answer 1

Potential Gross Income - Vacancy and Collection Loss - operating expenses - capital expenditures

Question 2

cash down payment

Answer 2

Acquisition price - Net loan proceeds

Question 3

before tax cash flow

Answer 3

NOI - annual debt service
-expected cash flow left over from rental operations each year after paying all operating expenses, capital expenditures and servicing the mortgage debt

Question 4

questions to ask when evaluating cash flow estimates

Answer 4

are the sources of income and expenses appropriate?
have the trends for each revenue and expense item been considered?
what about comparable properties?
what are the prevailing social and legal environments?
how is the demand and the supply of properties similar to the subject property likely to change?

Question 5

pro rata share

Answer 5

an amount proportionate to the ownership interest of an investor

Question 6

maximum statuatory federal income tax rate

Answer 6

35%

Question 7

after tax cash flow

Answer 7

the residual claim on the property’s cash flow after the mortgage lenders and the state and federal government have collected their share
NOI - annual debt service - tax liability

Question 8

going-in cap rate

Answer 8

NOI/acquisition price

Question 9

equity dividend rate

Answer 9

before tax cash flow/equity investment

Question 10

net income multiplier

Answer 10

acquisition price/ NOI

Question 11

effective gross income multiplier

Answer 11

acquisition price/effective gross income

Question 12

operating expense ratio

Answer 12

operating expenses/effective gross income

Question 13

debt coverage ratio

Answer 13

NOI/Debt service

Question 14

loan to value ratio

Answer 14

mortgage balance/property value

Question 15

debt yield ratio

Answer 15

NOI/Loan amount