A property is offered for $650,000, $409,000 of which is financed through a first mortgage note. The following data reflect the expected first-year operating results:
Potential gross rent $150,000
Less: Vacancy and uncollectible rent 8,000
Effective gross income $142,000
Less: Operating expenses 80,000
Net operating income $62,000
Less: Debt service 50,000
Before-tax cash flow $12,000
Plus: Principal paid 1,600
Less: Cost recovery allowance 18,000
Taxable income (loss) ($5,000)
Times: Marginal income tax rate (federal and state) .40
Income tax (tax savings) ($2,000)
Before-tax cash flow $12,000
Plus: Tax savings 2,000
After-tax cash flow $14,000
Required: Based on the above forecast, compute:
I. The potential gross income multiplier;
II. The operating ratio;
III. The debt coverage ratio;
IV. The overall capitalization rate;
V. The cash-on-cash rate of return.