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We are fortunate to have stood on the shoulders of giants. One such giant was the late Ronald E. Gettel, MAI, who has provided us with many real estate guidelines and rules of thumb including “GETTEL’S METHOD”.½
The Gettel Method is a quick method of checking or selecting overall capitalization rates. The Gettel Method considers typical mortgage loan terms without involving complicated forecasts, formulas or mathematics. Typical mortgage loan-to-value ratios, mortgage constants, and debt coverage factors are of primary interest to well-informed investors in different types of investment grade real estate. Select the three financing criteria most representative for the property type under consideration and multiply them together for an overall capitalization rate.
For example, if typical available financing terms and conditions are:
70% Loan-to-Value Ratio
7.0% Annual Nominal Interest Rate
25 Year Amortization
1.2 Debt Coverage Ratio
Based upon these mortgage loan terms, an overall capitalization rate “Ro” may be computed using the “Gettel Method” equation:
M x Rm x DCR = Ro
Where “M” is the percentage of loan-to-value, “Rm” is the annual mortgage constant, and “DCR” is the debt coverage ratio.
.70 x .0848 x 1.2 = .0712
The computation demonstrates that the overall capitalization rate may approximate 7.0%, which is what would be imposed if the typical conventional financing terms above were considered.
Current market forces influenced by market speculation, tax motivations, risk considerations and other investor yield criteria are implicit in this method. However, one must have a thorough understanding of mortgage lending practices to use this method well.
½ See Ronald E. Gettel, “Gettel’s Method”, Real Estate Guidelines & Rules of Thumb, McGraw- Hill, 1976, p.136
See Ronald E. Gettel, “Good Grief, Another Method of Selecting Capitalization Rates,” The Appraisal Journal, January 1978
See “Debt Coverage Formula” The Appraisal of Real Estate, Eighth Edition, American Institute of Real Estate Appraisers of the National Association of Realtors, 1983, p.394