Question

Suppose your lender agrees to an 80% LTV, the cost to borrow $1 at 8% for 30 years equals $0.0888 per year, NOI = $20,000, annual debt service = $7,000 and your down payment was $100,000. Using the Band of Investment Approach to estimating your cap rate, the cap rate would equal approximately:

7.1% |
||

2.6% |
||

8.88% |
||

9.7% |

Answer #1

from band of investment method

total loan 400000

down payment 100000

ltv 80%

Capitalization Rate **CR = (Equity % x Rate of equity) +
(LTV Ratio x Debt Rate)**

Where

LTV = Loan Amount / Property Value

Equity % = 1 – LTV

Equity Rate = Equity return required by equity investors

Debt Rate = Return required by lender

mortgage constant = annual debt service/total loan= 7000/400000=0.0175

debt rate 8% as given

0.2*0.08+0.8*0.0175 = 0.016+0.014 = 0.03

approximately 3%

You borrow $75,000 for 30 years at 11% interest compounded
annually. The value of the property is $100,000, PGI= $20,000,
vacancy rates are 8%, and operating expenses are $8,100.
1. Calculate the mortgage constant.
2. Calculate the annual debt service.
3. Calculate the EGI, NOI, and BTCF
4. Calculate the overall capitalization rate, using the
band-of-investment approach.

An Office building is listed for sale at $500,000. You can
borrow 80% at 6% interest amortized monthly for a 20 year term and
put 20% down. Your required unleveraged IRR is 10% and you want to
use a 9% terminal cap rate. You plan a five year holding period
after the purchase. You have calculated the annual pre-debt service
NOI for each year as: Yr. 1 = $40,000 Yr. 2 = $41,000 Yr. 3 =
$42,000 Yr. 4 =...

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