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Terms/Variables/Assumptions:
Property Value or Sale Price
Annual Net Operating Income
Annual Equity Yield aka Cash on Cash
Loan to Value Ratio Maximum
Annual Mortgage Interest Rate
Investment Holding Term in Years / Loan Term
Mortgage Amortization in Years
Mortgage Debt Service Coverage Ratio Minimum
Value Change (Appreciation/Depreciation)
Calculations needed for cap rates below
Loan Amount based on Value or Sale Price x Loan to Value
Balloon Payment at end of above term
Monthly Loan Payment
Percent of Mortgage Paid Off at Maturity
Buyer Equity Ratio
Sinking Fund Factor
Annual Mortgage Constant
Method 1: Direct Income Capitalization Rate Formula:
Formula = Net Operating Income Divided by Property Value or Sale Price
Cap Rate =
Method 2: Debt Coverage Capitalization Rate Formula:
Formula= Debt Service Coverage Ratio x Mortgage Constant x Loan to Value
Cap Rate =
Method 3: Band of Investment Capitalization Rate Formula:
Formula = Loan Ratio x mortgage constant plus Equity Ratio x Equity Return Desired
Cap Rate =
Method 4: Ellwood Formula - later simplified and called the Ackerson format:
Formula - see below as this formula is much more complicated
Cap Rate =
Ellwood Capitalization Rate Formula and Calculation:
Loan to Value
X Annual Loan Constant
+ Equity Ratio
X Equity Yield Rate
- Loan Ratio
X % Paid off X Sinking Fund
+/- Value Change
X Sinking Fund
Add the total of the above four lines for Answer
Multiply Answer by 100 to get Capitalization Rate
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