Cap Rate Tools

This option is a sub-section item on the Financing & Value Indicators tab.  

As an additional resource, the Narrative1 DCF includes Mortgage Equity and Debt Coverage Ratio Analyses. These methods build up capitalization rates based on typical mortgage terms and investor requirements.

Mortgage Equity Analysis        
Through a blend of mortgage and equity requirements, a capitalization rate may be synthesized. For market based loan terms, debt coverage ratios, cap rates, equity yields, and other financial benchmarks, check out RealtyRates at 

The required inputs are:

Mortgage Interest Rate, Loan to Value and Term: Enter the mortgage terms that are most typical (not necessary actual) for this property type. These variables are used to develop the mortgage constant, which is the annual amount of debt service as a percentage of the loan. For example, if the annual debt service is $10,000 and the original loan was $100,000, the mortgage constant would be 10%. 

If the actual mortgage terms are not typical, do not use them as this will skew the cap rate and value estimate. For example, highly favorable mortgage terms that are not available to most buyers will tend to produce a lower cap rate and therefore a higher value estimate. 

Equity Yield Rate: This is the overall yield to the investor. In addition to annual cash flows, the yield rate includes profits from appreciation and debt reduction. 

Property Value Change: This is the total value change expected for the property over the holding period. The income for an extra year is developed only for estimating resale value. The actual resale theoretically occurs on the last day of the holding period. 

Holding Period: This the length of time in years the investment is expected to held.
Mortgage Equity Analysis
Constant* Ratio = %
Equity Yield Rate x Ratio = %
   Weighted Average = %
Less Equity Buildup:
ratio x percent paid off x sinking fund factor (SFF)
% x % x % = (%)
Adjustment for Depreciation or Appreciation:

depreciation (or minus appreciation) x SFF (Sinking Fund Factor)
% x = (%)
Capitalization Rate = %
Debt Coverage Ratio Analysis
This method is synthesizes a capitalization rate with typical mortgage terms and is therefore geared toward the lender's perspective. The formula is:

Debt Coverage Ratio x Loan to Value Ratio x Mortgage Constant = Cap Rate

Mortgage Constant: See above.

Debt Coverage Ratio (DCR): This is the ratio by which annual income exceeds debt. Similar to the basis for selecting mortgage terms, use a DCR that most lenders require. These typically run from 1.1 to 1.3. 

Loan to Value Ratio: See above.