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%