Yesterday, we covered Step 4 of the Investment Property Valuation Calculator (IPV). In the fourth step, investors found an estimated valuation of their commercial property by combing the income withe expenses. In Step 5, we’ll examine the debt taken on through your investment and the monthly payments you’ll make on your commercial real estate.
In Step 5 of the IPV Calculator, we’ll perform a financial analysis and take a look at the debt you’ll be incurring by investing in a commercial property.
The first information you’ll be asked for is the down payment and loan amount.
The down payment is the amount of money a buyer needs to pay up front before they can sign the building contract. Most property owners expect some form of down payment as a way to prove buyers have the capital to afford making monthly mortgage payments. The loan amount is simply how much money you’ll be borrowing to purchase the property.
After the down payment and loan amount, you’ll fill in information on Interest Rate, Amortization Period, and Monthly Payment.
The interest rate is the percent charged for borrowing assets. If the bank loaned you money, they make a profit from it by charging you an interest rate based on the total still owed.
An amortization period is the amount of time it will take you pay off the debt with fixed monthly installments. The calculator will then crunch your expected monthly payments based off the total loan and how long you will be paying it off. The finished Investment Property Valuation Calculator report will detail how much you will have left to pay off every month.
The final slots for Step 5, Annual Debt Service and Debt Coverage Ratio (DCR), are automatically calculated for you if all the above information has been filled out.
Your annual debt service is simply how much money you will need to generate yearly to cover both your repayment loans and the interest on top of them. The debt coverage ratio is determined by dividing the NOI by the debt service. Or to put it simply, how much you’ll be making by how much you’ll owe. Typically, a bank with require a DCR of 1%> before loaning you any money, as that signifies your property will generate a positive cash flow.
When you’ve entered all the values you can, hit “Go to next step” to continue valuing your property.
Come back Monday when we detail Step 6 of the Investment Property Valuation Calculator!