EZLOAN, EZLOAN you did not read my last post before you did your research. :banghead
I stated that yield capitalization is the preferred method by meself and many REITs across the country for that matter. Yield capitalization does take into account the things you listed, and thats why its preferred. It is also very technical and not for beginners who don’t understand the six functions of a dollar and how they are applied to real estate.
BOI is a good method for a quick evaluation that with a little knowledge of the market can be very useful. Is it widely used in appraisal?..No The reason is simplicity and documentation. It’s easier to explain your value decision based on past sales than assumptions your making about the market. Which, is what an investor does with value. Appraised value and investment value are not the same. Appraisers try to explain the market while investors (buyers of real estate) make the market decisions. Market extraction is the preferred method for appraisers MAI and alike if the data is available. If the data is not available they will use other methods to arrive at a market value…ie Cost & Income
Mikes approach makes sense Iron. The reason it does is because where he likes to buy. We can not give you a real idea of value without knowing your market. Look at sales in your market and that will tell you all you need to know.
10 units @ 100,000(market value) = $1,000,000
NOI = 100,000
Cap = .10(within market range via sales)
I want an equity position of 20% and I have 5% of my own. I also want a total return of 13.33% and an equity return of 15%. With that said, I would need to buy it for $750,000. I need to buy it at $750,000 because $100,000/.13333333 = $750,000.
Does it meet my equity return requirement?
Remember BOI, well here it is applied. I have a mortgage interest rate of 8.00% and a mortgage constant of 9.262%. You now have debt service a year at $69,463 on $750,000 and a CFBT of $30,537 a year for a total return on equity of $30,537/$250,000 = 12.21% or your return on invested equity $30,537/$50,000 = 60.07%.
BOI = .09262(.75) + .1221(.25) = .06947 + .03053 = .10
I had to change the last part of this post because I was way off on my analysis. I apologize for the misinformation, I was tired last night when I wrote it. If I made any other mistakes please correct me but, I think we are fine.