Financing, Valuation, and Investment Analysis
Financing Basics
Know the loan vocabulary: LTV, PITI, points, APR, amortization, balloon, ARM (index, margin, caps), PMI, escrow/impound, and the difference between conventional, FHA, VA, and seller financing. Regulation Z/TRID govern disclosures; RESPA governs settlement practices and prohibits kickbacks; ECOA and Fair Housing bar discriminatory lending. Qualifying ratios (historically 28/36) compare housing expense and total debt to gross income. Discount points buy down the rate; the APR expresses the true cost of credit.
Valuation Approaches
Sales comparison (the approach for residential resale), cost (new or special-purpose property, using reproduction cost less depreciation plus land), and income (income-producing property, reconciled through the cap rate or gross rent multiplier). Depreciation is physical, functional, or external. Highest and best use frames every appraisal. For property tax, Arkansas assesses real property at 20% of market value, a frequently tested number.
Investment Analysis
NOI = effective gross income minus operating expenses (never include debt service or depreciation). Cap rate = NOI ÷ price; value = NOI ÷ cap rate. Cash-on-cash = before-tax cash flow ÷ cash invested. Leverage, DSCR, and after-tax analysis round out the picture, along with depreciation and Section 1031 exchanges.
Traps and Rule of Thumb
Trap: deducting mortgage payments in NOI. Trap: using the cost approach for an old house.
Worked example: NOI $36,000, price $450,000 → cap rate 8%. At an 8% cap rate, every $1,000 of NOI is worth $12,500 of value.