Band Of Investment

Band Of Investment Definition

Band of Investment is a financial method of calculating an investment property’s capitalization rate by using a weighted average of an investor’s expected returns for both equity and debt.

Explanation

The Band of Investment method considers both assumed rates of return a real estate investor would seek for a loan (assumed interest rate) and an expected return an investor would seek for an equity investment.

The BOI method then uses a weighted average of these rates of return (typically based on the percentage of equity to debt a project employs) to determine the overall capitalization rate (Cap Rate) to use in valuing the property.

As an example, assume an investment property is acquired by using 25% equity and 75% debt.

If an investor typically is seeking a 5% return on debt, and an 8% return on equity, then the weighted debt cap rate would be (.75 x .05) = .0375.

And the weighted equity cap rate would be (.25 x .08) = .02.

These rates are added: .0375 + .02 = .0575 (the weighted capitalization rate) via the BOI method.