Wwwgfedunet 60 188 real estate investment indices

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Real Estate investment indices
 Transaction-based indices
 Repeat-sales index : relies on repeat sales of the same property. A
change in market conditions can be measured once a property is
sold twice. Accordingly, a regression is developed to allocate the
change in value to each quarter.
 Hedonic index : requires only one sale. A regression is developed to
control for differences in property characteristics such as size, age,
location, and so forth.

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Financial Ratios Used to Analysis —— Debt
 Lenders often use the debt service coverage ratio (DSCR) and the loan-to-
value (LTV) ratio to determine the maximum loan amount on a specific
property. The maximum loan amount is based on the measure that results in
the lowest debt.
 Debt service coverage ratio (DSCR)
 Debt service (loan payment) includes interest and principal
 Loan-to-value (LTV) ratio is calculated as follows:
First-year NOI
DSCR =
Debt service
Loan amount
LTV =
Appraisal value

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Financial Ratios Used to Analysis
 Example (1): Maximum loan amount
 A real estate lender agreed to make a 10% interest-only loan on a
property that just appraised for € 1,200,000 as long as the debt
service coverage ratio is at least 1.5 and the loan-to-value ratio
does not exceed 80%. Calculate the maximum loan amount
assuming 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, the
property will support a debt service payment of € 90,000 [135,000
NOI / 1.5]. Thus, the loan amount would be € 900,000 [90,000
payment / 10% interest rate]. In this case, the maximum Loan
amount 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].

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Financial Ratios Used to Analysis
 Equity dividend rate (cash-on-cash return) is calculated as follows, which
measures the cash return on the amount of cash invested:
 Leveraged IRR
 Consider the cash flows over the entire holding period including the
change in value of the original investment.
 At the end of the holding period (i.e., net sales proceeds) are reduced by
the outstanding mortgage balance.
 Unleveraged IRR
 The initial cash outflow is higher because no debt is incurred. The
annual cash flows are higher because there is no debt service, and the
terminal cash flow is higher because no mortgage balance is repaid at
the end of the holding period.
First year cash flow
Equity dividend rate =
Equity

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Financial Ratios Used to Analysis
 Example (2): Equity dividend maximum loan amount
 Returning to the previous example, calculate the equity dividend
rate (cash-on-cash return) assuming the property is purchased for
the 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).