You are considering the purchase of a quadruplex apartment building.
The overall capitalization rate of the purchase is 8%.
The effective gross income multiplier is 33.75, which can be calculated as follows: $200,000 / ($13,440/0.4).
The equity dividend rate (the before-tax return on equity) is 25%, which can be calculated as follows: 0.08*((1-0.4)/0.6).
The debt coverage ratio (DCR)is 1, which can be calculated as follows: EGI/(Loan Amount * Interest Rate).
If the lender requires a minimum debt coverage ratio of 1.2 and you decide to borrow more than $140,000 then the largest loan amount you can obtain would be $175,000; this figure being derived by rearranging the formula for DCR so it reads Loan Amount = EGI /(Interest Rate * Minimum Required DCR)).
The unlevered internal rate of return (IRR) is 15.34%, which can be calculated by taking the net present value (NPV) to 0 using an Excel spreadsheet with cash flow inputs as mentioned above, and solving for the IRR.
The unlevered net present value (NPV) is $190,009, which can be calculated by discounting the cash flows at 14% and subtracting the purchase price from the discounted cumulative cash flows: ($130,000 + $135,650 + $141, 685.75 +$148 331 .56+$855 200)(1/1.14^4)-($720 000).
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