Download Financing Real Estate Investment: Debt and Mortgage Markets and more Exams Investment Theory in PDF only on Docsity! Chapter 10 - Financing Real Estate Investment Selected end of chapter solutions and/or directions to answers: 1. See page 181 of the text for a description of the primary mortgage market. 2. See page 182-3 for a description and discussion of the secondary mortgage market. 1. The coverage ratio is referred to as the debt service coverage ratio in class. It is simply the NOI of a property divided by the annual debt service (NOI/DS). 10. Advantage of debt? This problem illustrates: You are buying a shopping center for $1 million with a net operating income of $150,000 per year. You are contemplating either a cash purchase of $1 million or using $300,000 down with a loan for $700,000. The annual debt service on the loan is $90,000. Ignoring taxes, what is the impact of the debt in this example? The advantage of debt is a return on your money of 20% with debt financing, versus a return of only 15% without debt financing. Without debt your return is your cap rate: 150,000/1,000,000 or 15%. With debt, your return is (150,000-90,000)/300,000 or 20%. 11. Disadvantage of debt? Extend the problem above. Assume NOI falls to $50,000. Return without debt falls to 5% (50,000/1,000,000). But with debt, your return goes negative: (50,000- 90,000)/300,000 is -40,000/300,000 or -13%. 12. The three main risks facing a lender, any lender, are liquidity, default and re-investment risk. (pages 180-181 of the text) Selected chapter 10 objective practice questions: 1. The gradual withdrawal of regulated lenders from making commercial real estate loans has placed major new emphasis on other primary sources of mortgage money such as: (A) federal government business loan programs (B) state supported programs for local pension fund money (C) non-bank lenders such as General Electric (D) the sale of commercial mortgage-backed securities 2. One function of the secondary mortgage market is to (A) buy loans from loan originators (B) regulate the mortgage market (C) control market interest rates (D) advise federal regulators on mortgage standards 3. All of the following resulted, until recently and with the Great Recession, from federal agency underwriting of mortgage loan pools that collateralize mortgage-backed securities EXCEPT: (A) a federal government cash subsidy of mortgage loans (B) a credit enhancement for the mortgage-backed securities (C) a broader market in which to sell the securities (D) adequate funding for residential loans 4. The expression “neutral leverage” means (A) no borrowed money is used (B) no gain is achieved with borrowed money (C) borrowed money reduces the return on an investment (D) borrowed money reduces equity cash required but the interest rate paid equals the return on an investment docsity.com
