Which theory could be used to determine a capitalization rate in real estate appraisal?

The band of investment theory is a method used in real estate appraisal to determine the capitalization rate, which reflects the rate of return on an investment property. This theory operates on the premise that a property is valued as a sum of the invested capital’s costs, considering both equity and debt. By analyzing the proportion of debt versus equity financing, appraisers can derive a weighted average cost of capital that effectively represents the capitalization rate.

In this context, the band of investment theory calculates the overall capitalization rate as a function of the expected return on equity investments and the interest costs on debt. This approach is particularly useful because it provides a direct way to integrate various financing assumptions into the capitalization rate calculation, which is essential for potential investors looking to understand the financial viability of real estate investments.

Other methods, such as the sales comparison approach and the cost approach, serve different appraisal purposes. The sales comparison approach focuses on analyzing recent sales of comparable properties to estimate value without directly determining a capitalization rate. The cost approach estimates value based on the cost of reconstructing the asset, also not leading to a direct calculation of capitalization rates. The gross rent multiplier estimates value based on rental income but does not provide an explicit capitalization rate, as it is more geared toward rental yield assessments rather