How much is your property really worth?
The value of a property can be determined in different ways, depending on the type and use of the property. One of the most common methods is the capitalised earnings value method, which is used in particular for yield-oriented properties. It is often used for apartment blocks, commercial properties or other properties that generate regular income. But how does this method work and is it the right choice for your property? Read on to find out more.
How does the capitalised earnings method work?
The income capitalisation approach aims to determine the economic value of a property based on the expected income and the associated costs. The value is not primarily determined by the structural characteristics of the property, but by the achievable income. The calculation comprises several steps:
- Determination of net rental income: Firstly, the annual rental income is calculated, minus the operating costs borne by the owner (e.g. maintenance or administration).
- Deduction of management costs: These include running costs such as administration, repairs and reserves for major refurbishments.
- Capitalisation: The adjusted annual income is multiplied by a so-called multiplier, which depends on the market interest rate and the remaining useful life of the property. This results in the capitalised earnings value of the property.
When is the capitalised earnings method suitable?
The capitalised earnings value method is particularly suitable for properties used for capital investment. This includes
- Apartment blocks that have several residential units.
- Commercial property such as office buildings, retail space or warehouses.
- Holiday homes that are regularly rented out to guests.
The income capitalisation approach is generally less suitable for owner-occupied properties that do not generate regular income. In such cases, other methods such as the comparative value or asset value method are used.
The advantages of the capitalised earnings method
This method provides a realistic assessment of the economic value of an income-generating property. It takes into account not only the current income, but also market factors such as interest rate trends or regional demand. This makes it ideal for making well-founded decisions - be it when buying, selling or valuing a portfolio.
Use professional support
Calculating the capitalised earnings value can be complex and requires precise knowledge of market developments and the legal framework. An experienced estate agent or surveyor can support you in determining the value and ensure that all relevant factors are taken into account.
Conclusion: The income capitalisation approach is a proven method for determining the value of properties that generate regular income. If you own a rental property or a commercial property, this method is ideal for realistically estimating the market value. Seek advice from an expert to achieve the best possible result and develop the right strategy for your property.
What is the capitalised earnings method?
The income capitalisation approach focuses on the income that a property can generate - the so-called gross income. This takes into account the sustainably achievable rental income, based on standard local rents, and not on the rents currently realised (actual rents).
The method is mainly used for apartment buildings, office buildings, commercial buildings, shopping centres, multi-storey car parks and similar properties. The aim is to calculate the potential profit for a buyer.
How does the calculation work?
- Property value: The land value is calculated separately, often using the comparative value method.
- Building value: The value of the buildings is determined on the basis of the realisable rental income less management costs (administration, maintenance, loss of rent).
- Total return value: The total income value of the property is calculated from the land and building value.
There are two variants of the procedure:
- Complete capitalised earnings value method: The land value interest rate is also taken into account here, based on the local property interest rate.
- Simple capitalised earnings value method: This procedure dispenses with the land value interest and concentrates exclusively on the building structures.
What influences the market value?
As with other procedures, special circumstances can have a positive or negative influence on the market value:
- A freshly refurbished property with modern facilities and high letting potential achieves a higher market value.
- A property in need of refurbishment (e.g. outdated heating, uninsulated façade) is valued correspondingly lower.
Important: The value of the land can fluctuate, while the value of the building tends to fall due to age and wear and tear. Regular investment is therefore crucial in order to keep the value and rental income stable.
