band of investment

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Band of Investment

An appraisal method for investment property that determines the amount one would pay for a piece of real estate such that it equals its operating income. One calculates the band of investment by multiplying the operating income by a capitalization rate. The appraiser must estimate the capitalization rate because it is not known for sure until the property is purchased. The band of investment can be used to analyze whether or not to buy an investment property.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

band of investment

An appraisal method used to arrive at a capitalization rate for the valuation of income-producing property.Appraisers determine the net operating income from a property,and then divide that figure by a number, called the cap rate or capitalization rate, in order to arrive at a property value.Conceptually,that value represents what an investor would pay to receive an income equal to that of the property.(The net operating income is fairly easy to calculate,but what cap rate do you use? There are no tables or standards.The appraiser must choose a figure that is justifiable.)

The band of investment method considers the interest rates currently available in the marketplace to finance the particular property. In commercial markets, interest rates may vary significantly depending on which lenders are trying to add what particular property types to their loan portfolios in order to achieve an optimum mix.After deciding on the property loan interest rate,the appraiser then calculates the amount of equity the purchaser would have to pay at closing,and what reasonable investors would expect for a percentage return on their equity each year.These two percentages are then blended according to the percentage of debt and percentage of equity typically seen when financing such properties.The blended number is the cap rate the appraiser will use to help determine value.

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.