Property Investment, Finance and Market Analysis
What the exam tests
This domain tests investment metrics, financing effects and market analysis. You must calculate and interpret, not just quote formulas.
Core rules
- Net operating income (NOI) = gross rental income less vacancies, collection losses and operating expenses, but before financing and capital expenditure.
- Capitalisation rate = NOI ÷ capital value. It reflects risk and growth expectations; do not confuse it with equity return.
- DSCR = NOI ÷ debt service. LTV = loan ÷ value. Cash-on-cash = pre-tax cash flow ÷ equity.
- IRR and NPV use all cash flows, including purchase, NOI, capex and sale proceeds. Sensitivity analysis tests rent, yield, interest and exit cap rate.
- Market analysis examines supply, demand, vacancy, absorption, rents and transaction evidence.
Worked example
A property costs RM10 million and produces NOI of RM800,000. The cap rate is RM800k ÷ RM10m = 8.0%. A 60% loan is RM6 million at 5% interest-only, so annual interest is RM300,000. Equity is RM4 million; pre-tax cash flow after interest is RM500,000; cash-on-cash return = RM500k ÷ RM4m = 12.5%. DSCR = RM800k ÷ RM300k = 2.67. If the market cap rate is 7.5%, indicated value = RM800k ÷ 0.075 = RM10.67 million.
Traps
Using gross rent instead of NOI; deducting mortgage interest when capitalising; ignoring capital expenditure and voids; confusing DSCR with interest cover; and treating a contract rent as market rent without analysis.