{"id":408,"date":"2018-02-13T03:33:27","date_gmt":"2018-02-13T03:33:27","guid":{"rendered":"http:\/\/www.realestatewords.com\/?page_id=408"},"modified":"2022-02-21T20:19:15","modified_gmt":"2022-02-21T20:19:15","slug":"band-of-investment","status":"publish","type":"page","link":"https:\/\/www.realestatewords.com\/band-of-investment\/","title":{"rendered":"Band Of Investment"},"content":{"rendered":"

Band Of Investment Definition<\/h2>\n

Band of Investment<\/strong> is a financial method of calculating an investment property<\/a>\u2019s capitalization rate<\/a> by using a weighted average of an investor\u2019s expected returns for both equity and debt.<\/p>\n

Explanation<\/h2>\n

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

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)<\/a> to use in valuing the property.<\/p>\n

As an example, assume an investment property is acquired by using 25% equity and 75% debt.<\/p>\n

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.<\/p>\n

And the weighted equity cap rate would be (.25 x .08) = .02.<\/p>\n

These rates are added: .0375 + .02 = .0575 (the weighted capitalization rate) via the BOI method.<\/p>\n

 <\/p>\n