The income capitalization approach is mostly used for rented apartments and commercial space. This includes apartment buildings, office and commercial buildings, but also shopping centers, parking garages and logistics areas.
The starting point is the annual net income. This refers to the rental income less the costs for maintenance, administration and possible loss of rent that the owner has to bear. The next step is to determine the land value. This is usually done with the help of a Comparative value method. The final total income value is calculated from these two factors, the land value of the property and the amount of rental income.
A distinction is made between a simple income capitalization approach and a full income capitalization approach. In the former, the land value and the resulting land value interest are not taken into account. Only the value of the property built on it is included in the valuation.
In the full income capitalization approach, the return on land value is also included. This is done on the basis of a comparative value method. The property interest rate is used for this purpose. It is determined by the local expert committees on the basis of past real estate transactions.
In the income capitalization approach, only the land value is subject to interest at this property interest rate, not the property built on it. This is because the value of the land is subject to fluctuations; the value of the building, on the other hand, tends to decline with age and wear and tear. If no permanent and comprehensive investment is made in a building, the achievable rent is also reduced.
As with the comparative and asset value method, the income capitalization method also takes into account circumstances that reduce or increase the value. For example, if the buyer of an apartment building has to expect to replace the roof truss in the foreseeable future, this is already reflected in the purchase price of the property in the form of a reduction.
Is an income capitalization approach suitable for your property? We will be happy to carry out the valuation for you.
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