Discounting by capitalisation or return

Author : Kristen

Discounting by capitalisation or return

This method provides the first indications of how much an investment property is worth. It is based on the relationship between the annual rent and the value of the real estate, thus showing a discounted return for the buyer. To do this, the surveyer will use the capitalisation rate specific to each category of real estate depending on its characteristics to determine a gross return. This gross return could be used to offset the buyer's own funding, charges inherent to the real estate as well as the cost of the eventual mortgage,that has made the aquisition of this property possible. The advantage of this method of assessment lies in the simplicity of the calculation, as the development of rents, maintenance and financial costs associated with ownership are not taken into consideration. In addition, the owner's tax situation may strongly affect the profitability of this type of investment, thus particular attention should be paid to the capitalisation rate used as a reference.  

 

Let's illustrate the method of discounting by capitalisation: the surveyor will consider concrete items related to the real estate, such as, for example, the annual rental status, operating costs with an estimated net rent capitalisation rate of 4.78% for example.

Gross annual rent    CHF 454,320
Operating costs -  CHF 104,493
Net rental income
   CHF 349,827
Net rent capitalised at 4.78 %    CHF 7,318,556

The potential buyer who wants to achieve a net rent return of 4.78% would have to buy a property worth a maximum of a rounded CHF 7,320,000 in order to achieve such a discounted return.

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