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Below you will find some of the basic commercial Loan calculations Lenders use to determine loan amounts and property value. Throughout the loan process your financial consultant will calculate and discuss these calculations in detail.
Loan-to-Value |
The Lender says they can only lend up to 75% LTV. What does this mean? |
Debt Service Coverage Ratio |
Almost all loans programs require a Debt Service Ratio. Does my property meet the lender's guidelines? |
Net Operating Income |
Net operating income is rental income of a property after operating expenses. These expenses would include all operating expenses, including maintenance, vacancy, janitorial, supplies, insurance, accounting, management, etc. |
Debt to Income Ratio |
The Lender indicates that I am over leveraged with my obligations to get the loan I need. How do I figure Debt to Income Ratios? |
Direct Capitalization Rate |
Throughout the country Cap Rates vary depending on property types, tenant quality, and net operating income. How do I calculate my Cap Rate? |
Gross Rent Multiplier |
My Real Estate Broker says my property has a Gross Rent Multiplier of 8. What is a Gross Rent Multiplier? |
Loan-To-Value Ratio
Loan-To-Value = Total loan balances (All mortgages) / Fair market value
Example:
75% LTV = $500,000 (1st mortgage) + $250,000 (2nd mortgage) / $1,000,000 (Fair market value)
Almost all lenders require a LTV of 75% or less. The exceptions to this rule are:
1. Apartment units which generally can go to 80% LTV
2. SBA loans which generally can go to 90% LTV
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Debt Service Coverage Ratio
Debt Service Coverage Ratio = Net Operating Income / Mortgage Debt Service
Example:
1.25 DCR = $62,500 Net Operating Income / $50,000 Annual Debt Service
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Net Operating Income
| |
|
|
| Potential gross income (all figures are on an annual basis) |
| Scheduled rent |
$xxxx |
| Other income |
$xxxx |
| Total potential gross income |
|
$xxxx |
| Vacancy and collection loss |
|
-xxx |
| Effective gross income |
|
$xxxx |
| Operating expenses |
| Fixed |
$xx |
| Variable |
$xx |
| Replacement allowance |
$xx |
| Total operating expenses |
|
-$xxxx |
| NET OPERATING INCOME |
|
$XXXX |
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Debt to Income Ratio
Debt Ratio = Monthly Debt Obligations / Monthly Gross Income
The Debt to Income Ratio compares the amount of debt that the borrower must pay each month to the amount of gross monthly income the borrower earns.
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Direct Capitalization Rate
Net Operating Income / Value = Direct Capitalization Rate
Example:
$300,000 / $5,000,000 = .06 or 6%
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Gross Rent Multiplier
Value = Potential Annual Gross Income X Gross Rent Multiplier
Example:
$1,200,000 = $150,000 (Potential Annual Gross Income) X 8 (Gross Rent Multiplier)
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