Using the band of investment with a 70% loan at a 7.2% mortgage constant and 30% equity requiring a 10.5% dividend, the overall rate is:
Correct Answer
A) 8.19%
Why this is correct: The Band of Investment (weighted average) method calculates the overall rate (R) as: (Loan-to-Value Ratio × Mortgage Constant) + (Equity Ratio × Equity Dividend Rate). Calculation: (0.70 × 0.072) + (0.30 × 0.105) = 0.0504 + 0.0315 = 0.0819 or 8.19%. Why the other choices are wrong: '17.7%, adding the two rates together' simply sums 7.2% and 10.5%. '8.85%, averaging the two rates evenly' averages them without weighting. '6.3%, weighting only the debt portion' uses only the debt component (0.70 × 0.072). Exam tip: For Band of Investment: Overall Rate = (LTV × Mortgage Constant) + (Equity % × Equity Rate).
Why This Is the Correct Answer
Why this is correct: The Band of Investment (weighted average) method calculates the overall rate (R) as: (Loan-to-Value Ratio × Mortgage Constant) + (Equity Ratio × Equity Dividend Rate). Calculation: (0.70 × 0.072) + (0.30 × 0.105) = 0.0504 + 0.0315 = 0.0819 or 8.19%. Why the other choices are wrong: '17.7%, adding the two rates together' simply sums 7.2% and 10.5%. '8.85%, averaging the two rates evenly' averages them without weighting. '6.3%, weighting only the debt portion' uses only the debt component (0.70 × 0.072). Exam tip: For Band of Investment: Overall Rate = (LTV × Mortgage Constant) + (Equity % × Equity Rate).
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In developing an income approach for a stabilized property, an appraiser estimates potential gross income based on market rent. Which of the following best describes the relationship between potential gross income and effective gross income?
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Effective gross income for a property with $95,000 PGI, 7% vacancy and $3,400 other income is: