1. (a) A factory cost Ksh 2,000,000 now. The expected gross potential income is Kshs 400,000 during the first year while vacancy and collection losses equals 10% of gross potential income. The operating expenses is 25% of effective gross income while capital expenditure equal 15% of expected gross income. Suppose an investor arranged for Kshs 1,500,000 mortgage loan which is 75% loan to value ration with an annual interest rate of 8%. The loan will be amortized over 30 years with a monthly payment of Kshs.11,250. The total upfront financing costs will equal 3.1% of the loan.
Required:
(i) What is the estimated net operating income. [5 marks]
(ii) What is the first year after tax cash flows. [3 marks]
(iii) Calculate the capitalization rate [2 marks]
(iv) Equity dividend rate [2 marks]
(v) Gross income multiplier [2 marks]
(vi) Operating expense ratio [2 marks]
(vii) Debt coverage ration [3 marks]
(b) Discuss the challenges of real estate investment to investor. [6 marks]
2. (a) Despite the fact that most of the population live in semi permanent and temporary structures, it is still difficult for low and middle income earners to access the mortgage facility in the real estate market.
Required:
(i) Discuss the factor that has led to this exclusion. [12 marks]
(ii) Explain types of risks that affect mortgage loan. [8 marks]
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