Part 6 problem solving Flashcards
Pre tax Cash Flow is also referred to
as equity cash flow,
equity dividend
PGI = $55,000 Vacancy = 6% (RO) = 8.5% OER = 48%
Helpful hint: Use IRV (Income / Rate = Value)
To find the indicated value of this property, we need to get down to net operating income.
We have PGI as a given, and must subtract vacancy:
$55,000 PGI - (.06 x $55,000) = EGI
$55,000 PGI - $3,300 vacancy = $51,700 EGI
Then we must find the operating expense dollar amount, which we can determine from the operating expense ratio. The OER formula (OER = OE / EGI) can be rewritten as OE = OER x EGI
(.48 x $51,700 ) = $24,816 OE
Now we can calculate net operating income (IO):
$51,700 - $24,816 = $26,884
Now that we have net operating income (IO) and the overall rate (RO), we can calculate value using IRV:
= $316,282.35
Of course, appraisers do not want to give an illusion of precision, so you should round this number:
$316,300 is an appropriate value indication for this property.
An investor queried a financial institution and found that it will lend 80% of the sale price and the mortgage constant (RM) is 8.5%. The investor is considering a $625,000 purchase of a property with IO at $125,000.
What is the pre-tax cash flow (PTCF) for this property using the mortgage constant supplied by the bank?
In this problem, the hard work of calculating net operating income (steps 1-5 on the Income Template) has already been done for us. However, we need to find the annual debt service to calculate pre-tax cash flow (PTCF).
We first need to find mortgage value (VM). To get this, we multiply the purchase price of $625,000 by the loan-to-value ratio of 80% because the lender has already agreed to lend 80% of the property’s value. The amount of the mortgage (VM) is contingent upon the value of the property (VO).
$625,000 × 0.80 = $500,000 loan amount (VM)
Now we can use IRV and apply it to the mortgage to calculate debt service. VM × RM = IM
$500,000 (VM) × 0.085 (RM) = $42,500 (IM)
Now that we have IM we can subtract it from IO to obtain PTCF.
$125,000 IO - $42,500 IM = $82,500 PTCF
Using the following data, what is the effective gross income multiplier (EGIM)? PGI = $130,000 Value = $650,000 Collection Loss = 1% OER = 38%
In Problem 7, we are looking for the EGIM, which is a multiplier or factor, so we will need to use VIF. However, we only have value, so we need to find the effective income.
We first need to find effective gross income (EGI). To get this, refer to the formulas you learned or use the Income Template.
$130,000 (PGI) - $1,300 (1%) collection loss = $128,700 (EGI)
Now we can use VIF and to calculate EGIM. V ÷ I = F
$650,000 (V) ÷ $128,700 (EGI) = 5.0505 or 5.05 (EGIM)
What happened to OER?
OER is a decoy. Since we are not going down as far as net operating income in this problem, it is not needed to solve for EGIM.
Using the following data, what is the value?
EGI = $304,000
Vacancy = 5%
PGIM = 8.5
Figure out the PGI. Remember that Vacancy is a percentage of PGI, not EGI, so you cannot simply add 5% to EGI.
We first need to find the potential gross income (PGI). To get this, we’ll need to work backward from EGI. The first step is to divide EGI by the occupancy, which is the complement to the vacancy. This procedure is the inverse (opposite) from calculating EGI. In order to calculate EGI, PGI is multiplied by .95 (1 - .05). In order to go back to PGI, you must do the opposite mathematical operation and divide.
$304,000 (EGI) ÷ .95 (occupancy) = $320,000 (PGI)
Can you just multiply by 1.05?
No, you can’t, because in calculating EGI, you multiply by .95. So, in order to get to PGI, you need to do the opposite operation, which is to DIVIDE by .95.
Second, you can use VIF to calculate the value. Take our PGI and multiply it by our PGIM.
$320,000 (PGI) × 8.5 (PGIM) = $2,720,000 value
The NOI for a property is $120,000 with vacancy at 5%. If the operating
expense ratio (OER) is 40%, what is the potential gross income (PGI) for the
property?
Step 1: $120,000 NOI / 0.60 NIR = $200,000 EGI
Step 2: $200,000 / 0.95 occupancy = $210,526.32 PGI
Note: NIR is the complement of OER.
What is a mortgage constant?
it is the annual debt service divided by the original loan amount.
includes principal and interest payments
An investor learned that a financial institution would lend 75% of value on
a specific property. The lender indicated the mortgage constant was 10.7%
based on a 15-year term. If the investor purchases the property for $1 million,
what is the annual debt service?
75% of 1,000,000 = 750,000
.107 x $750,000 = $80,250
Multiply the loan amount by the mortgage constant is decimal
(RM) R with a little m is
mortgage constant
How to derive a value of a property?
Net operating income divided by the overall cap rate
An investor queried a fi nancial institution and found that it will lend 80%
of the sale price, and the mortgage constant (RM) is 8.5%. The investor is
considering a $625,000 purchase of a property with NOI (IO) at $125,000.
What is the pre-tax cash fl ow (PTCF) for this property using the mortgage
constant supplied by the bank?
Hint: Use the mortgage constant to derive the annual debt service, then solve
for PTCF (the formula for the last step is IO − IM = PTCF).
Step 1: $625,000 × 0.80 = $500,000 VM (loan amount)
Step 2: $500,000 VM × 0.085 RM = $42,500 IM (annual debt serv.)
Step 3: $125,000 IO − $42,500 IM = $82,500 PTCF
How to derive the effective gross income multiplier?
sales price divided by the EGI (effective gross income)
How to figure the debt service using the Mortgage constant?
Make sure you pay attention to the LTV then take the mortgage amount and (x) by the mortgage constant
100,000 x 0.075
Which of the following expenses that may be found on a property owner’s financial statements, should be excluded in the appraiser’s reconstructed operating statement?
corporate franchise tax
The subject property has a potential gross income (PGI) of $450,000, vacancy and collection losses of 5%, fixed expenses of $56,000, and variable expenses of $125,000. Recent sales of very similar properties in this market suggest that a capitalization rate of 8.0% is appropriate. The capitalization rates were extracted from sales in which the price was divided into the estimate of net operating income from the broker. What is the market value of the subject property?
$3,081,250
$450,000 x 0.95 = $427,500 (EGI)
$427,500 - $56,000 - $125,000 = $246,500 (NOI)
$246,500 / 0.08 = $3,081,250
