This paper examines the effects of below-market financing on rents and selling prices of residential income properties. A recursive model is used to estimate rent and price equations in order to determine the effect of favourable financing on each variable. The results indicate that below-market financing has a negative effect on rent and a positive effect on selling price. Average monthly rent per unit with below-market financing is about $43 less than the average rent with current-market financing. The degree of capitalisation of the financing premium (as indicated by cash equivalence) in the selling price is less than 100 per cent. The average financing premium reflected in the selling price is $4818. Various factors, including differences in marginal and average costs and leverage effects, are presented to explain these results.
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