Real Estate Finance and Economics
Mortgage Fundamentals
Know loan-to-value, debt service coverage ratio, amortization, and the difference between fixed-rate and adjustable-rate loans. LTV = loan ÷ value; DSCR = NOI ÷ debt service. Lenders typically require DSCR above 1.20 and LTV below 80% for conventional loans.
Time Value of Money
Master the six functions of a dollar: future value, present value, future value of an annuity, present value of an annuity, sinking fund, and mortgage amortization. Know that a sinking fund factor accumulates a future amount; the installment to amortize repays a present amount.
Economic Principles in Finance
Understand leverage (positive when the return on assets exceeds the cost of debt), capitalization rates as the relationship between NOI and value, and band of investment as a way to derive a rate from debt and equity components.
Worked Example
A property has NOI of $80,000 and debt service of $60,000. DSCR = $80,000 ÷ $60,000 = 1.33, which meets a 1.20 minimum. If the loan is $600,000 against a $1,000,000 value, LTV = 60%, comfortably below 80%.
Exam Traps
Do not confuse NOI with cash flow (cash flow is after debt service). Do not use gross income for DSCR. And remember that a higher cap rate generally means lower value for the same NOI.