Podcast
Questions and Answers
Name five methods of developing an overall capitalization rate (RO):
Name five methods of developing an overall capitalization rate (RO):
- Direct Income Capitalization, Market Yield Estimation, Operating Expense Alignment, Land Residual Valuation, Mortgage-Equity Balance Method
- Effective Gross Income Multiplier, Discount Yield Rate, Capitalization Analysis, Residual Land Approach, Recapture Rate Method
- Comparable Rent Assessment, Land Capitalization Ratio, Equity Adjustment Rate, Risk Premium Analysis, Expense Ratio Method
- Derivation from Comparable Sales, Band of Investment (Mortgage and Equity Components), Net Income Ratio, Debt Coverage Ratio, Band of Investment (Land and Improvement Components) (correct)
The summation method of estimating an overall yield rate is based upon the sum of four components. These components are:
The summation method of estimating an overall yield rate is based upon the sum of four components. These components are:
- Safe Rate, Risk Rate, Non-liquidity Rate, Management Rate (correct)
- Risk-Free Return Rate, Management Premium, Non-Liquidity Adjustment, Market Rate Risk
- Discount Yield, Recapture Rate, Operating Expense Ratio, Risk Coverage
- Economic Risk Premium, Operational Yield Factor, Tax Expense Adjustment, Cost of Capital Rate
When developing the overall capitalization rate from market comparisons, three critical items which must be highly comparable are:
When developing the overall capitalization rate from market comparisons, three critical items which must be highly comparable are:
- Land-to-Improvement Ratio, Operating Expense Ratio, Remaining Economic Life (correct)
- Comparable Rent Multiplier, Capital Adjustment Factor, Risk-Free Rate Analysis
- Expense Adjustment Ratio, Lease Structure, Market Conditions Alignment
- Effective Gross Income Multiplier, Depreciation Rate, Operating Cost Stability
Another name for the mortgage capitalization rate (RM) is:
Another name for the mortgage capitalization rate (RM) is:
The _____ technique computes a weighted average of the mortgage capitalization rate (RM) and equity capitalization rate (RE). The resulting weighted average is called the overall capitalization rate (Ro).
The _____ technique computes a weighted average of the mortgage capitalization rate (RM) and equity capitalization rate (RE). The resulting weighted average is called the overall capitalization rate (Ro).
The capitalization rate method most often used by lending institutions is the_________________ method:
The capitalization rate method most often used by lending institutions is the_________________ method:
The effective tax rate is the percentage that annual real estate taxes are in relation to total property value.
The effective tax rate is the percentage that annual real estate taxes are in relation to total property value.
Name the two methods of developing an effective tax rate.
Name the two methods of developing an effective tax rate.
The net income ratio method can be used to develop an overall capitalization rate when the net income ratio is divided by the:
The net income ratio method can be used to develop an overall capitalization rate when the net income ratio is divided by the:
What are the three components of an overall capitalization rate?
What are the three components of an overall capitalization rate?
The _____ for developing an overall capitalization rate is appropriate when the effective gross income multiplier is known.
The _____ for developing an overall capitalization rate is appropriate when the effective gross income multiplier is known.
The _____ reflects the relationship between the land income and land value.
The _____ reflects the relationship between the land income and land value.
The weighted average of the land capitalization rate and the building capitalization rate is known as the _____:
The weighted average of the land capitalization rate and the building capitalization rate is known as the _____:
Dividing the building (improvement) income by the __________ will result in the building (improvement) value.
Dividing the building (improvement) income by the __________ will result in the building (improvement) value.
The assessment level is 30% of appraised value, and the current tax rate is $8.50 per hundred. What is the effective tax rate expressed as a decimal and a percentage?
The assessment level is 30% of appraised value, and the current tax rate is $8.50 per hundred. What is the effective tax rate expressed as a decimal and a percentage?
Flashcards
Developing overall capitalization rate
Developing overall capitalization rate
Methods include derivation from comparable sales, band of investment, net income ratio, debt coverage ratio, and band of investment.
Summation method of estimating overall yield rate
Summation method of estimating overall yield rate
A method that sums safe rate, risk rate, non-liquidity rate, and management rate components.
Critical items for capitalization rate from market comparisons
Critical items for capitalization rate from market comparisons
Items which must be highly comparable are Land-to-Improvement Ratio, Operating Expense Ratio, Remaining Economic Life
Annual mortgage constant
Annual mortgage constant
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Band of investment technique
Band of investment technique
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Debt coverage ratio
Debt coverage ratio
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Effective tax rate
Effective tax rate
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Methods of developing an effective tax rate
Methods of developing an effective tax rate
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Effective gross income multiplier
Effective gross income multiplier
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Components of overall capitalization rate
Components of overall capitalization rate
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Land Capitalization Rate
Land Capitalization Rate
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Overall Capitalization Rate
Overall Capitalization Rate
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Study Notes
Methods for Developing Overall Capitalization Rate
- Acceptable methods involve: derivation from comparable sales, bands of investment (mortgage and equity components), net income ratio, debt coverage ratio, and band of investment (land and improvement components).
- These methods are recognized for allowing adjustments that consider financial and market data.
Summation Method for Estimating Overall Yield Rate
- The summation method calculates the overall yield rate (YOY_OYO) by summing Safe Rate, Risk Rate, Non-liquidity Rate, and Management Rate.
- This approach incorporates factors that demonstrate expected returns, based on risk, liquidity, safety, and management.
Critical Items for Market Comparison of Capitalization Rates
- To develop an overall capitalization rate from market comparisons, the Land-to-Improvement Ratio, Operating Expense Ratio, and Remaining Economic Life must be highly comparable.
- Comparability ensures market-derived capitalization rates are reliable between the properties.
Mortgage Capitalization Rate
- Another name for the mortgage capitalization rate (RMR_MRM) is annual mortgage constant.
- Mortgage capitalization rate (RM) represents the percentage of the original loan paid annually through principal and interest.
- It is determined by the ratio of total yearly mortgage payments to the amount borrowed.
Band of Investment Technique
- The Band of investment technique computes a weighted average of the mortgage capitalization rate (RM) and equity capitalization rate (RE).
- The band of investment technique calculates the overall capitalization rate (ROR_ORO) by weighting the mortgage rate and equity rate by their proportions of the total property value.
Capitalization Rate Method for Lending Institutions
- The debt coverage ratio is a capitalization rate method used by lending institutions.
- Lending institutions use the debt coverage ratio method to ensure a property's income can cover mortgage payments.
Effective Tax Rate
- The effective tax rate is the percentage that annual real estate taxes are in relation to total property value.
- It directly determines the burden of property relative to property value, reflecting the actual tax cost of ownership.
Methods for Developing Effective Tax Rate
- The EAT (Effective Tax Rate) formula calculates the relationship between taxes and property value.
- The market comparison method assesses tax rates by analyzing comparable properties.
Net Income Ratio Method
- Dividing the net income ratio by the effective gross income multiplier develops an overall capitalization rate.
- The Effective Gross Income Multiplier provides a capitalization rate that directly relates to the property’s income potential and market value.
Components of Overall Capitalization Rate
- An overall capitalization rate consists of the investor's desired return (Yo), the recapture of the investment (Rr), and the effective tax rate (ETR).
- This rate encapsulates all aspects of an income-producing property.
Calculating Overall Capitalization Rate when Effective Gross Income Multiplier is Known
- The Band of Investment Method and Market Comparison Method is appropriate for developing an overall capitalization rate when the effective gross income multiplier is known.
- Note - this is the answer in the reference material, there is no information to confirm or deny it's validity
Land Capitalization Rate
- The land capitalization rate reflects the relationship between land income and land value.
- The land capitalization rate (RL) is used to establish the return attributable to land by dividing land income by land value.
Overall Capitalization Rate
- The overall capitalization rate (Ro) represents the weighted average of the land capitalization rate (RL) and the building capitalization rate.
Building (Improvement) Capitalization Rate
- Building (improvement) income divided by Building (improvement) Capitalization Rate results in the building (improvement) value.
- The Re reflects the relationship between a single year's net income attributable to the building and the value of the building.
Effective Tax Rate Calculations
- At an assessment level of 30% of appraised value, and with a current tax rate of $8.50 per hundred, the effective tax rate is 0.0255 or 2.55%.
- The effective tax rate is calculated by multiplying the assessment level by the tax rate per dollar of value, reflecting the relationship between the assessed value of the property and the total tax liability.
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