Band of Investment [2952]

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The sale price was $7,000,000.  The mortgage was 70% LTV at 10% interest for a term of 20 years.  The NOI was $782,000.  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

10.0%

20

$4,900,000

0.117460

$575,554

 

 

Equity Dividend = NOI – Debt Service

$206,446

Equity Dividend Rate = Equity Dividend / Down Payment

9.83%

Mortgage Position x Mortgage Constant

0.082222

Equity Position x Equity Dividend Rate

0.029490

Capitalization Rate = sum of the two calculations above

0.111712

Converting to a percentage

11.2%

 

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

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

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