You are considering the purchase of an industrial warehouse.
The purchase price is $1 million. You expect to hold the property for five years. You have decided to finance the acquisition with the $700,000 loan, 10 percent interest rate, 30year term, and annual interest-only payments. (That is, the annual payment will not include any amortization of principal.) There are no up-front financing costs.
You estimate the following cash flows for the first year of operations: $135,000 Effective gross income 27,000 Operating expenses $108,000 NOI
What is the largest loan that you can obtain (holding the other terms constant) if the lender requires a debt service coverage ratio of at least 1.2?
