In a Nutshell
Here are some key questions that can be answered related to commercial real estate using a financial calculator, along with their significance and steps to calculate them using the BA II professional financial calculator app:
1. Mortgage Payments:
What will my monthly mortgage payments be?
Importance: Determines affordability and cash flow management.
Steps to Calculate (BA II Plus app):
- Enter loan amount (PV).
- Enter interest rate (I/Y).
- Enter loan term in months (N).
- Press PMT to get the monthly payment.
2. Debt Service Coverage Ratio (DSCR):
Does the property’s income cover its debt obligations?
Importance: Assesses financial risk and ability to meet loan payments.
Steps to Calculate:
- Divide net operating income (NOI) by annual debt service (mortgage payments).
3. Cash on Cash Return (CoC):
What percentage of my initial investment will I receive in annual cash flow?
Importance: Measures investment profitability and cash flow return.
Steps to Calculate:
- Divide annual cash flow by the total cash invested.
4. Internal Rate of Return (IRR):
What is the overall rate of return on the investment, considering cash flows and time value of money?
Importance: Evaluates the investment’s overall profitability and potential for growth.
Steps to Calculate (BA II Plus app):
- Enter cash outflows as negative values (CF0,ย CF1,ย CF2,ย etc.).
- Enter cash inflows as positive values.
- Press IRR to get the internal rate of return.
5. Net Present Value (NPV):
Is the investment worth more today than its future cash flows, considering the time value of money?
Importance: Assesses investment viability and potential for profit.
Steps to Calculate (BA II Plus app):
- Enter discount rate (I/Y).
- Enter cash flows (CF0,ย CF1,ย CF2,ย etc.).
- Press NPV to get the net present value.
6. Break-Even Analysis:
At what occupancy rate will the property’s income cover its expenses?
Importance: Determines risk tolerance and potential for profit or loss.
Steps to Calculate:
- Calculate fixed expenses.
- Calculate variable expenses per unit.
- Divide total fixed expenses by the difference between rent per unit and variable expenses per unit.
Remember:
- Consult the app’s manual for specific keystrokes and functions.
- Use accurate financial data for reliable results.
- Seek professional advice for complex calculations or investment decisions.