Property Valuation
A property manager tracks a building's 'break-even ratio.' The break-even point is when:
AA. Gross rents equal market value
BB. Operating expenses plus debt service equal effective gross income✓ Correct
CC. The capitalization rate equals the mortgage interest rate
DD. The net operating income equals the purchase price
Explanation
The break-even ratio (also called default ratio) measures when a property's income just covers its obligations. At break-even: Operating Expenses + Debt Service = Effective Gross Income.
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Key Terms to Know
Capitalization Rate (Cap Rate)
A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Net Operating Income (NOI)The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
Debt-to-Income Ratio (DTI)A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.
Math Concepts
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