Band of Investment [2951]

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The sale price was $1,000,000.  The mortgage was a 70% LTV at 9% interest for a term of 25 years.  The NOI was $130,000.  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

9.0%

25

$700,000

0.101806

$71,264

 

 

Equity Dividend = NOI – Debt Service

$58,736

Equity Dividend Rate = Equity  Dividend / Down Payment

19.6%

Mortgage Position x Mortgage Constant

0.071264

Equity Position x Equity Dividend Rate

0.058736

Capitalization Rate = sum of the two calculations above

0.130000

Converting to a percentage

13.0%

 

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

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

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