Unformatted text preview: ula: Net Operating Income = Property Value x Return (I = V x R) Example:
To receive a 12 percent return from an investment of $100,000, what would be the required net operating income of the purchased property? $100,000 x 12% = $12,000 The net operating income would have to be $12,000. 12-12 Licensing School for Appraisal, CPA, Contractors, Insurance, Real Estate, Notary, Nurse, Food Handlers, Tax and Securities 12: QUALIFYING THE PROPERTY
DETERMINING CAPITALIZATION RATE
The two most frequently used methods of deriving a capitalization rate are the comparative sales method and the band of investment method. COMPARATIVE SALES
The comparative sales method of deriving an appropriate cap rate is based upon an analysis of recent sales of comparable properties. The indicated capitalization rate is derived by dividing the net income from the property by its sale price. Example:
An apartment building with an annual net income of $75,000 recently sold for $750,000. The indicated capitalization rate is 10%. ($75,000 / $750,000 = .10 or 10%) BAND OF INVESTMENT
The band of investment method derives a capitalization rate which is a composite of the rates of return required by the lender and by the owner of the equity interest. The rate of return required by the lender reflects the relative attractiveness of the loan compared with alternate permitted investments for the lender's funds. Similarly, the equity component reflects the competitive alternate returns to equity, both before and after taxes. Mortgage Interest Technique. The capitalization rate is computed as a weighted average of the most probable mortgage terms and the return required by the equity investor. Example:
Assume that a long–term loan of 70% of the property value is available at 9% interest, and investors require 12% interest on the equity. What is the capitalization rate? Interest First Mortgage Equity Capitalization Rate Portion .70 x .30 x Rate .09 .12 Product =.063 =.036 =.099 or 9.9% Dynasty School (www.dynastySchool.com) 12-13 REAL ESTATE FINANCE
In the above example, the perc...
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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.
- Spring '10