60-188Real Estate investment indicesTransaction-based indicesRepeat-sales index: relies on repeat sales of the same property. Achange in market conditions can be measured once a property issold twice. Accordingly, a regression is developed to allocate thechange in value to each quarter.Hedonic index: requires only one sale. A regression is developed tocontrol for differences in property characteristics such as size, age,location, and so forth.

61-188Financial Ratios Used to Analysis——DebtLenders often use the debt service coverage ratio (DSCR) and the loan-to-value (LTV) ratio to determine the maximum loan amount on a specificproperty. The maximum loan amount is based on the measure that results inthe lowest debt.Debt service coverage ratio (DSCR)Debt service (loan payment) includes interest and principalLoan-to-value (LTV) ratiois calculated as follows:First-year NOIDSCR =Debt serviceLoan amountLTV =Appraisal value

62-188Financial Ratios Used to AnalysisExample (1): Maximum loan amountA real estate lender agreed to make a 10% interest-only loan on aproperty that just appraised for€1,200,000 as long as the debtservice coverage ratio is at least 1.5 and the loan-to-value ratiodoes not exceed 80%. Calculate the maximum loan amountassuming the property’s NOI is €135,000.Answer:Using the LTV ratio, the property will support a loan amount of€960,000 [1,200,000 value×80% LTV ratio]. Using the DSCR, theproperty will support a debt service payment of€90,000 [135,000NOI / 1.5]. Thus, the loan amount would be€900,000 [90,000payment / 10% interest rate]. In this case, the maximum Loanamount is the€900,000, which is the lower of the two amounts. At€900,000, the LTV is 75% [900,000 loan amount / 1,200,000 value]and the DSCR is 1.5 [135,000 NOI /90,000 payment].

63-188Financial Ratios Used to AnalysisEquity dividend rate (cash-on-cash return)is calculated as follows, whichmeasures the cash return on the amount of cash invested:Leveraged IRRConsider the cash flows over the entire holding period including thechange in value of the original investment.At the end of the holding period (i.e., net sales proceeds) are reduced bythe outstanding mortgage balance.Unleveraged IRRThe initial cash outflow is higher because no debt is incurred. Theannual cash flows are higher because there is no debt service, and theterminal cash flow is higher because no mortgage balance is repaid atthe end of the holding period.First year cash flowEquity dividend rate =Equity

64-188Financial Ratios Used to AnalysisExample (2): Equity dividend maximum loan amountReturning to the previous example, calculate the equity dividendrate (cash-on-cash return) assuming the property is purchased forthe appraised value.Answer:The€1,200,000 property was financed with€900,000 debt and€300,000 equity. First-year cash flow is€45,000 (135,000 NOI–90,000 debt service payment). Thus, the equity dividend rate is 15%(45,000 first year cash flow / 300,000 equity).

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