| Course | MT431 Real Estate Finance and Ethics |
|---|---|
| Unit | Unit 7 |
| Paper type | Income property pro forma |
| Length | About 1,100 words, 7 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | BS in Business Administration |
| Updated | October 2026 |
Free sample paper for MT431 Unit 7
When Debt Costs More Than the Building Earns: An MT431 Unit 7 Income Property Pro Forma for a 14-Unit Building
[Student Name]
Purdue University Global
MT431: Real Estate Finance and Ethics
Unit 7 Income Property Pro Forma
[Instructor Name]
[Date]
The building, rents, expenses and loan terms are composite; every figure is computed from the stated inputs, and the sources cited are real.
The Rent Roll
The building holds eight two-bedroom units leased at $1,385 a month and six one-bedroom units at $1,120. Gross potential rent, the rent if every unit were leased all year at those rates, is $213,600.
Effective Gross Income
A vacancy and credit loss allowance of 6 percent, $12,816, is applied to rent only, since vacancy affects rent and not the laundry machines. Laundry and storage income adds $4,380. Effective gross income is $205,164.
Operating Expenses
Ten expense lines total $91,920, or 44.8 percent of effective gross income. Property tax is $24,600, from the current assessment. Utilities paid by the owner, water, sewer and common-area electricity, are $14,200. Management is $12,310, charged at 6 percent of collected income rather than potential rent, because managers are paid on what they collect. Repairs and maintenance are $11,600. Insurance is $9,800. Payroll for a part-time superintendent is $7,200. Replacement reserves are $4,900, about $350 per unit, set aside for roofs, boilers and appliances. Landscaping and snow removal are $3,100, trash $2,400 and legal and accounting $1,810.
Replacement reserves are included above the line, as most lenders and appraisers expect for a building of this age, because the building will need those replacements whether or not it carries a loan. Leaving them out would make the property look more profitable than it is.
Net Operating Income
Net operating income is effective gross income minus operating expenses: $205,164 minus $91,920, or $113,244. It is ruled off before any financing appears. Net operating income measures what the building earns as a building, regardless of who owns it or how they paid for it. At the $1,475,000 asking price, the cap rate, net operating income divided by price, is 7.68 percent.
Net operating income belongs to the building; debt service belongs to the buyer's financing, and the pro forma keeps them on opposite sides of a line.
Financing Below the Line
The proposed loan is $1,032,500, 70 percent of the price, at 6.6 percent amortized over 25 years. Annual debt service is $84,434. The loan constant, annual debt service divided by the loan amount, is 8.18 percent.
The debt service coverage ratio, net operating income divided by debt service, is 1.34, above the 1.25 minimum that agency multifamily lenders commonly set for a building like this (Freddie Mac, 2025). Cash flow after debt service is $28,810.
The Investor's Return
The buyer's cash in the deal is the $442,500 down payment plus about $22,125 in closing costs, $464,625 in all. Cash flow of $28,810 on that investment is a cash-on-cash return of 6.20 percent.
Without a loan, the same buyer would have paid $1,497,125 including closing costs and earned the full $113,244, about 7.56 percent. The loan lowers the return on the buyer's cash by more than a point.
Why the Debt Hurts Here
Borrowing helps an investor when the debt costs less than the property earns. The test is the loan constant against the cap rate. Here the constant of 8.18 percent exceeds the cap rate of 7.68 percent, so each borrowed dollar costs more per year than it brings in. Geltner et al. (2014) describe this unfavorable case: the investor's current return on equity falls as more debt is added, though the debt still magnifies any gain or loss in the property's value.
The constant would need to fall below 7.68 percent for the loan to help. On a 25-year amortization that requires an interest rate below about 5.93 percent, or a longer amortization that lowers the constant at the same rate.
Sensitivity
Two tables test the pro forma. The first varies vacancy. At 4 percent, net operating income rises to $117,260 and coverage to 1.39. At 8 percent, it falls to $109,228 and coverage to 1.29. At 10 percent, it falls to $105,213 and coverage to 1.25, the lender's floor. The break-even occupancy, at which net operating income just covers debt service, is about 80 percent.
The second varies the interest rate. At 5.6 percent, debt service falls to $76,827, coverage rises to 1.47 and the cash-on-cash return to 7.84 percent, now above the cap rate. At 7.6 percent, debt service rises to $92,368, coverage falls to 1.23, below the lender's floor, and the cash-on-cash return to 4.49 percent.
What Happens at Sale
Current cash yield is only half of an investor's return. If the building's value rises 2 percent a year and it is sold after seven years, the gain belongs entirely to the equity holder, and a buyer who put down 30 percent captures that gain on a base roughly three times larger than her cash. The same debt that lowers her yield each year raises her share of any appreciation. The reverse is also true. If the value falls 10 percent, the loss comes entirely out of her equity, a loss of about a third of her $464,625. A buyer who borrows here is accepting a lower income today in exchange for a larger stake in what the building is worth later, for better or worse.
Questions for the Seller and the Lender
Three questions would sharpen the pro forma before an offer. The seller should provide trailing twelve-month operating statements, since the expense lines here are estimates for a building of this type. The lender should quote a 30-year amortization alongside the 25-year one, which would lower the constant. And the assessor's office should confirm whether a sale at this price triggers a reassessment, which could raise the $24,600 property tax line and, with it, every ratio below the net operating income line.
What the Pro Forma Shows
The building is sound: it carries its expenses with a 55 percent margin before financing and could lose a fifth of its rent before failing to cover debt service. The financing is the weak part. At 6.6 percent, debt makes the buyer's current return worse, not better. A buyer who expects rents and values to rise may still choose to borrow for the larger gain at sale, and Modigliani and Miller (1958) are a reminder that debt changes the risk of the equity as much as its expected return. A buyer who wants current income should consider a lower loan amount, a longer amortization or waiting for a lower rate.
References
Freddie Mac. (2025). Multifamily seller/servicer guide. https://mf.freddiemac.com/lenders/guide/
Geltner, D. M., Miller, N. G., Clayton, J., & Eichholtz, P. (2014). Commercial real estate analysis and investments (3rd ed.). OnCourse Learning.
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. American Economic Review, 48(3), 261-297.
What the MT431 Unit 7 assignment asks for
An MT431 pro forma lays out one year of a rental building's operations and then tests the loan proposed for it. Instructors expect a rent roll, gross potential rent, a vacancy and credit loss allowance applied to rent, other income and effective gross income. Operating expenses should be listed line by line, with management based on collected income and replacement reserves included. Net operating income must be computed before any debt service, since it measures the property, not the financing. Below the line come the loan, its annual debt service, the loan constant, the coverage ratio and cash flow. The cap rate and cash-on-cash return should be compared to show whether the debt helps or hurts. Sensitivity tables for vacancy and interest rates are commonly required.
How this MT431 Unit 7 example is built
This example starts with the rent roll and works down to effective gross income, applying vacancy to rent alone. Ten expense lines are given with a reason for management and reserves. Net operating income is ruled off, under a highlighted line on why debt service stays below it. The financing section reports the loan, debt service, constant, coverage and cash flow, with the agency coverage floor. The buyer's cash-on-cash return is set against the unborrowed yield. A section explains why the debt hurts here, after Geltner and colleagues, and what rate would reverse it. Vacancy and rate tables follow. A section on sale shows how the debt magnifies gains and losses, citing Modigliani and Miller, and questions for the seller and lender close it.
Reading the MT431 Unit 7 grading rubric
Pro formas in MT431 are judged first on where debt service sits. A net operating income computed after the mortgage blends the building with its financing, and every ratio built on it inherits the error; instructors treat that as a conceptual failure rather than a slip. Rubrics check that vacancy applies to rent, not to other income. Credit goes to management charged on collected income and to reserves included above the line. Correct loan constant, coverage and cash flow figures earn method marks. Comparing the constant with the cap rate to judge the debt's effect shows the insight the unit tests. Sensitivity tables for vacancy and rate, with a break-even occupancy, demonstrate judgment, as does a clear operating statement.
Common MT431 Unit 7 mistakes, and how to avoid them
The most common weak pro forma subtracts the mortgage payment before reporting net operating income, which makes the cap rate meaningless. Another frequent error applies vacancy to laundry and storage income. Students often charge management on potential rent, or leave replacement reserves out, which flatters the property. Many compute coverage and cash flow correctly but never ask whether borrowing helps the return. Sensitivity is often a single what-if. Before submitting, check that your net operating income line contains no financing figures at all, then divide annual debt service by the loan amount and compare the result with your cap rate. If the first is larger, the paper should say plainly that the loan reduces the buyer's current return.
Get an MT431 Unit 7 example written to your instructions
A rent roll, the expense figures, the asking price and the loan terms the Unit 7 case sets out are what the free first pro forma needs, alongside the rubric. It returns in 24-48h, holds net operating income above any financing line, computes cap rate, coverage and cash-on-cash return by script, and tests at least one weaker year. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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MT431 Unit 7 questions, answered
What does a coverage ratio tell a lender?
It divides net operating income by annual loan payments to show how many times the building's earnings cover its debt. A ratio of 1.34 means NOI exceeds debt service by 34 percent. Commercial lenders commonly require a minimum, often somewhere around 1.20 to 1.35 depending on property type and market, and size the loan so the ratio clears it.
Should reserves count as an operating expense in the MT431 pro forma?
Practice varies. Many lenders and appraisers deduct replacement reserves above NOI, while some investors list them below it with capital spending. Follow your course text or prompt, state the choice, and apply it consistently, because the placement changes NOI, the cap rate and coverage. The sample deducts $350 per unit before arriving at NOI.
Where can I find a free MT431 Unit 7 sample paper?
This page carries the full MT431 Unit 7 pro forma, taking a composite 14-unit building from rent roll to cash flow after debt service.
Why does borrowing lower the buyer's return in the MT431 Unit 7 sample?
The loan costs 8.18 percent of its amount each year, while the building earns only 7.68 percent of its price, so the loan drags the cash yield on the buyer's equity below what the building alone pays.
What interest rate would make the MT431 Unit 7 loan help the buyer?
On a 25-year amortization, a rate below about 5.93 percent, which brings the loan constant under the 7.68 percent cap rate.