Possibilities for a NOI that is too high:
Expenses are too high
Our rents aren't high enough
Our expenses are too high
Our density is too low
Okay, so there is a gap. How do we close it?
Try to close the gap:
Fine the supportable Mortgage
NOI/(Debt Coverage Ratio x Mortgage Constant)
Mortgage Constant: Yearly debt service for a dollar's worth of loan
Ellwood Tables: series of numbers that list all possibilities of interest rates and mortgage terms and mortgage constants.
Yearly Debt Service = (Loan x MC)
- Excel function: pmt (rate, term, -1)
- =pmt(.07, 30, -1) format cells to get the decimals
- to get monthly, divide rate by 12
- if you put the loan value instead of the minus one you get the...mc i think?
- DCR = (NOI/YDS)
- YDS=(Loan x MC)
- Loan = NOI/DCR *MC
+ my affective loan to cost ratio is super low
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don't do it, lady.
start fiddling around with the costs.
negotiate a lower land cost
negotiate a lower construction cost
raise the rent
raise density (remember that this increases construction cost)
2 things to remember
when does density help?
when you are building apartment buildings and your land cost is below 15-20$/sqft, density rarely helps (it is cheaper to buy more land than to make a denser building).
good designer/good architect can design higher densities, keep the cost under control, and make the density seem low a.k.a. elegant density). always remember your client or you will have a building and no tenants.
Check out what a lower interest rate would do and lower parking spaces--> it would lower the MC which would get you a bigger loan
that's not really realistic
so check out your expense rate since you are in control of this.
hold on to the land for a year or two and wait and see if the interest rates go down.
always use current cap rates--> no one can predict
relationship between cap rate and the rent (chapter 7 explains)
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Financing
- Two types of loans
- Mortgage loan
- compound
- long term
- 2 types
- non-recourse: if you as the owner fail to pay, they can take back your property
- recourse loans: the bank can take back any of your assets, up to the value of the loan (happens when market is risky)
- 30 year mortgage: fixed rate level payment fully amortized loan
- fixed rate: rate doesn't change
- level payment: the payment doesn't change
- fully amortized: at the end of the amortization period, you've paid back the entire loan
- adjustable or variable rate mortgage
- variable payment: monthly goes up and down
- fully amortized
- Adjustable rate or Variable payment, negative amortization loan
- at the end of the loan you can owe money on the loan
- never get these, ever.
- Simple interest rate balloon loan
- you pay along the way
- you pay the premium and forgone interest at the end
- Interest only balloon payment
- reverse annuity mortgage (RAM)
- the bank takes out a mortgage on your house
- you get a monthly payment from the bank
- at the end of the period your bank owns your house
make payments for five years but the interest and the principle are geared to a 20 year period.
lenders like short terms and long amortization periods because the lender is protected from interest rate risk. adjustable rate mortgages are also good for banks.
difference between market value and outstanding value]
the bank will look at your past record when you go to get a loan, Fair Ison, TRW, rate your credit. above 600-->good credit.
Bank rates you on three things
- credit score
- property
- commission an appraisal
- ability to repay the loan
- income
- tenants paying the rent
- DCR= NOI/YDS
- you want it to be greater than 1.1
- Loans to value Ratio: 80%
- house costs 100,000
- %80,000
- Qualifying ratio
- YDS:Income
- only for owner occupied
- should not be more than 22-33%
- Gross
- without taxes
- Net
- with taxes
- fees for the lender to initiate the loan (1-2% of the loan)
- points: prepayment to cover the risk of a higher rate in the mortgage backed security spread process (rate difference between the primary adn secondary market)
- bank sells you a loan at 6% but fanny mae is only taking loans at 7% or higher.
- Conventional/Conforming Mortgages: traditionally up to 400,000
- Jumbo Mortgages: 400,000+, held in bank portfolios, .5-1% increase in mortgage
- Prepayment penalties
- lump sum paid when you get out early
- residential prepayed penalties were outlawed in the 80s
- still can do it for commercial
- Participating loan
- for commercial properties
- the lender gets a share of the cash flow
- borrower gets lower interest rate
- can finance more of the project
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