Valuation methods at a glance: The capitalized earnings method

There are various methods for determining the value of a property. In our series, we have already presented the comparative value method and the asset value method. Now we will take a closer look at the capitalized earnings method and explain how it works and when it is used.

In the capitalized earnings method, the market value of a property is derived from the rental income. The method is therefore used for rented apartments and commercial space. In addition to apartment buildings, office and commercial buildings, this also includes shopping centers, parking garages and logistics areas.

First, the Land value and the value of the structural installations calculated separately. The starting point for determining the value of the building is the rental income, less the costs of management, maintenance and possible rent losses to be borne by the owner. The final total income value is calculated from these two factors, the value of the property and the amount of rental income.

A distinction is made between the so-called complete capitalized earnings value method and the simple capitalized earnings value method. In the latter, the land value and the resulting land value interest are not taken into account. Only the value of the property built on it plays a role in determining the market value here.

In contrast, the full capitalized earnings value method includes the land value interest rate in the calculation. On the basis of a comparative value method, the real estate interest rate is used for this purpose by local appraisal committees.

While the value of the land is subject to fluctuations, the value of the building tends to keep declining due to age and wear and tear. If investments in a building are not made constantly and comprehensively, the rent that can be achieved will inevitably also be reduced.

As with the comparative and asset value methods, certain circumstances and conditions can also reduce or increase the market value in the capitalized earnings value method. The asking price of a freshly refurbished apartment building with prospects of high rental income is therefore not comparable to a property whose roof truss will soon need to be replaced.

Would you like to learn more about the advantages of the capitalized earnings method? We will advise you comprehensively and without obligation.

Photo: hayatikyhan / iStock.com

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