What does the band of investments technique compute?

The band of investments technique is primarily used to compute the overall capital rate, also known as the overall capitalization rate or the capitalization rate. This method is instrumental in the appraisal of income-producing properties as it combines different sources of financing to derive a single cap rate that represents the return on investment for a property.

In practice, the band of investments technique considers distinct components of financing, typically the debt and equity portions of the total investment. By calculating the required rates of return for both debt and equity, an appraiser can determine how these rates, weighted by their respective proportions in the overall investment, result in a cohesive capitalization rate for the property. This overall capital rate allows for the assessment of present value based on expected future income and is critical for investors when deciding on property acquisitions.

By focusing on this technique, appraisers and investors can better understand the return expectations based on the financing structure of an investment, making it an essential tool in real estate valuation.