A property that can be purchased for $1.7 million has an expected first-year net operating income of $190,000. An investor is considering two loan alternatives:
LOAN A: a 70% loan-to-value ratio, with interest at 7.5% per annum; the loan will require level monthly payments to amortize the principal over 20 years.
LOAN B: an 80% loan-to-value ratio, with interest at 8% per annum; this loan will require level monthly payments to amortize the principal over 25 years.
For each loan, determine:
1) The expected before-tax cash flow (NOI - annual debt service) as a percentage of the equity investment
2) The actual before-tax cash flow as a percentage of the equity investment, if the actual net operating income falls 10% below expectations
3) The percentage by which actual net operating income can fall below expectations before it is just sufficient to provide for annual debt service
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