REE-4103 Chapter Notes - Chapter 23: Earnings Before Interest And Taxes, Capitalization Rate, Mortgage Loan
2 May 2018
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Course
Professor
- Direct Capitalization
o Used in the income capitalization approach to convert
a sigle ear’s icoe epectac ito a value
indication
o Net Operating Income Estimate/Income Rate
o Widely used when properties are already operating
on a stabilized basis
o Advantages
▪ Simple to use and easy to explain
▪ Expresses market thinking
▪ Provides strong market evidence of value
- Derivation of Overall Capitalization Rates
o Value= NOI/Cap Rate
o Derivation of Ro from Comparable Sales
▪ Preferred technique when sufficient information
about sales of similar, competitive properties is
available
▪ Overall Rate= NOI/Sale Price
o Derivation of Ro by Band of Investment – Mortgage
and Equity
▪ The mortgage cap rate (Rm) is the ratio of the
annual debt service to the principal amount of
the mortgage loan
▪ The mortgage interest rate or the yield rate
(Ym), is the internal rate of return that equates
the present value of the mortgage payments
with the principal balance of the loan
▪ The rate used to capitalize equity income is the
equity cap rate (Re)
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