Band of Investment [2950]

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The sale price was $400,000.  The mortgage was a 75% LTV at 7% interest for a term of 30 years.  The NOI was $45,000.  What is the capitalization rate by the band of investment method?

 

The formula:

 

Capitalization rate = (Mortgage Position x Mortgage Constant) + (Equity Position x Equity Dividend Rate)

 

Column

Rate

Years

Mortgage Amount

Mortgage Constant

Debt Service

6

7.0%

30

$300,000

0.080586

$24,176

 

Equity Dividend = NOI – Debt Service

$20,824

Equity Dividend Rate = Equity Dividend / Down Payment

20.8%

Mortgage Position x Mortgage Constant

0.060440

Equity Position x Equity Dividend Rate

0.052060

Capitalization Rate = sum of the two calculations above

0.112500

Converting to a percentage

11.3%

 

The mortgage position is the LTV (loan to value ratio)

The equity position is the ETV (equity to value ratio)

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