real estate finance - full book (500 pgs)

# A primary consideration in the reconciliation process

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Unformatted text preview: entages are only for return on total property value. For appraisal use, a cap rate must also include a proper return of investment, reduced to cover improvements only, over their remaining economic life. Example An 80:20 building–to–land ratio is 80% depreciable. Assume a 25–year remaining economic life, or 4% yearly depreciation rate. 80% x 4% = 3.2% weighted depreciation rate. Add the result to a desired rate of return on investment to derive an overall rate. The capitalization rates must provide for both returns (of and on) in realty appraisal. Mortgage Constant Technique –This technique uses mortgage constants rather than the nominal interest rates used in the mortgage interest technique. A mortgage constant is the total annual payment of principal and interest, with level payment amortization, expressed as a percentage of the initial principal amount of the loan. Constants are found in published financial tables. This technique uses a weighted average of the mortgage constant and the return on equity required by investors. • • Use of the mortgage constant technique provides for recapture (return of the investment) in addition to the return on the investment This is the preferred method for arriving at an overall capitalization rate and is the one most used by both appraisers and investors. However, it should be noted that it assumes that the amortization of loan principal satisfies all of the capital recapture requirements. Example Assume a 75% loan for 25 years at 9.5% interest represents the prevailing financing terms. The mortgage constant for these figures is .104880. If investors require 12% return on equity, the capitalization rate is calculated as follows: Interest First Mortgage Equity Overall Capitalization 12-14 Portion .75 x .25 x Rate .104880 .12 Product =.0786 =.03 = .1086 or 0.86% Licensing School for Appraisal, CPA, Contractors, Insurance, Real Estate, Notary, Nurse, Food Handlers, Tax and Securities 12: QUALIFYING THE PROPERTY Rate (Mortga...
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## This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.

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