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Direct Capitalization Formula with Appre ciation or Depreciation For no appreciation or depreciation, ∆ o = 0, and for the fully depreciated asset, ∆ o = -1. Band of Investment Formulas
Capitalization rates are expressed as a capital “R.” Since there are a number of different capitalization rates used by appraisers, a subscript is used to specify which capitalization rate is intended. An equity capitalization rate, therefore, is written as R. E. Appraisal Institute. Mathematics and Analytical Skills Review 5
The value of the first year's income (or payment) is I. The value V is related to the first year's income by the direct capitalization formula: V= I . i + SFF(n, r) The new deposit in the sinking fund each year to recover the capital is SFF(n,r)V which is abbreviated SFFV.
Capitalization Rate = Net Operating Income / Value. As a practical matter, the ―value‖ here may be the price at which a property is offered, and your purpose is to perform the calculation to determine if the re-sulting cap rate meets your investment objectives.
Calculate the capitalization rate of an investment and demonstrate the relationship between capitaliza-tion rate, income, and value. Example 1: If a property’s annual net income is $10,000 and the investor desires a capitalization rate of 10%, what would the investor be willing to pay? RE_Math_OD_v1.0_wkbk.indd 7 12/3/2014 1:38:17 PM
The value of any cash-flow producing asset is the present value of the expected cash flows on it. Just as discounted cash flow valuation models, such as the dividend discount model, can be used to value financial assets, they can also be used to value cash flow producing real estate investments.
= ∑ =1 , (1+ ) (1) where V is the present value of the valuation subject, It is the value of the t-th current periodic (usually annual) cash, while In includes the terminal value Vn at the end of the forecast period (the value of the final return of capital), is discount rate, is the number of the last period (year).
