Capitalized income method for properties
The capitalized income method shows how high the return on a property will be. Comparis explains what this means and how it works.
07.03.2023
iStock/guvendemir
1. What is the capitalized income method?
The capitalized income method uses net rental income to measure capitalized income on property. The income value thus shows the possible return on a property.
Market value of a property
The market value describes the current value of a property in the context of the property market. This may be higher or lower than the actual selling price. In the capitalized income method, you determine the market value by subtracting the technical age devaluation from the capitalized income value.
Would you like to get an initial idea of the value of a property? The online property valuation tool provides you with an initial, approximate indication.
2. How do I calculate the capitalized income value of a property?
The capitalized income value is based on the achievable annual rental income. In other words, it means the potential rental income after the deduction of ancillary costs such as heating, electricity and water.
The annual net rental income is divided by the capitalization rate. The capitalization rate depends on many different factors, such as location or operating and maintenance costs. It is determined individually for each property – there is no standard capitalization rate.
Capitalized income value = annual net rental income × 100 / capitalization rate
Calculating the income value of a property: example calculation
Let’s imagine that the annual net rental income is 30,000 francs and the capitalization rate is 3.5%. Then the calculation of the capitalized income value would be as follows:
30,000 × 100 / 3.5 = 857,143 francs
3. What exactly is the capitalized income method?
How accurate the capitalized income method is depends on the property being valued. Note that: the more typical a property is, the more accurate the valuation. Typical properties include office buildings or rented apartment buildings. In these cases, the uncertainties are at plus/minus 10%.
4. Who can determine the capitalized income value of a property?
Determining the capitalization rate requires specialist expertise and access to the relevant software. It is therefore not generally possible for laypeople to determine the capitalized income value themselves. For a property valuation, contact professional estate agents, real estate consulting companies or banks.
How much does the capitalized income method cost for property?
if you sell your property using an estate agent, the valuation is included in their commission. The cost of having the capitalized income value appraised independently varies according to provider. For example, with Iazi, you pay 650 francs for the valuation using the capitalized income method.
5. When does it make sense to use the capitalized income method?
The capitalized income method shows the potential profit that the property can make. Therefore, the method makes sense above all if the property is an investment. Examples include:
Rented apartment buildings
Commercial properties (office buildings, hotels and restaurants)
6. What other valuation methods are there?
In addition to the capitalized income method, there are other methods for valuing property:
The hedonic pricing model: this model is suitable primarily for standard types of owner-occupied property. Hedonic pricing determines the value of the property on the basis of prices actually paid for similar properties in the area.
Intrinsic value method: this method is recommended when valuing luxury property. This approach bases the overall value of the property on the value of the land and the current value of the building on that land. The intrinsic value may therefore differ from the market value.
This article was first published on 17.06.2021
