Title: Determining the lowest loan-to-value ratio on commercial real estate investment

Authors: Jeng-Hsiang Lin

Addresses: Department of Architecture, Hwa Hsia University of Technology, No.111, Gongjhuan Rd., Jhonghe District, New Taipei City 23568, Taiwan

Abstract: This study develops a reliability-based decision-making procedure for determining the lowest loan-to-value (LTV) ratio on a commercial real estate investment in seismically active regions. The decision-making of investment is based on two criteria including required rate of return and reliability of return on investment, set by the investor. The uncertainties induced by economic fluctuation of rent market of real estate and random repair cost due to earthquake-induced damages were addressed in this study. Based on the Monte Carlo (MC) simulation technique, a sampling process was repeatedly performed to construct relation curves of LTV ratio versus reliability of required rate of return for various interest rates. These curves can be used as a tool to determine the lowest LTV ratio acceptable under the two criteria set by the investor. An example case is presented to illustrate the decision-making process.

Keywords: commercial real estate; loan-to-value ratio; investment; decision-making.

DOI: 10.1504/IJEPEE.2018.093945

International Journal of Economic Policy in Emerging Economies, 2018 Vol.11 No.3, pp.228 - 237

Received: 21 Sep 2015
Accepted: 17 Oct 2015

Published online: 10 Aug 2018 *

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