Income method of real estate valuation example. Income approach to real estate valuation

In our country, selling or renting real estate Lately is gaining momentum in commerce, resulting in the need for owners to clearly determine the value of their property. This is necessary in order to profitably sell or lease real estate in the future.

Today there is great amount organizations where qualified specialists will help you make the correct calculation. There are several methods for calculating this indicator, but recently the income approach to real estate valuation has been gaining popularity. What is its essence, features and advantages should be considered in more detail.

The essence of the technique

The income approach to real estate valuation is a procedure when the appraiser calculates the value of an object based on the possible future profit from it. That is, the owner of the building can receive from an expert a certain forecast of profitability from the property, and not just the dry value today. The income approach is suitable for valuation only in cases where the income and expenses from the property can be accurately predicted into the future. The entire procedure is carried out in several stages of the appraiser’s work.

To complete the process and produce the result, the specialist must:

  1. Precisely determine the time frame for the forecast to be issued. The fact is that after a certain time, the issued assessment becomes irrelevant due to the need to carry out repairs or other factors affecting the value of the property. All methods of the income approach must have a strictly established framework for its operation.
  2. Calculate possible profits and losses from real estate during the period of validity of the issued forecast and after its end.
  3. In accordance with the investment attributed to the property and taking into account the level of risk, calculate the discount rate. This is necessary for future comparison of the specialist’s assessment results and real profits.

A way to simplify the process

To the evaluation method income approach was more understandable and simpler for ordinary citizens, there are several options for simplifying it. To do this, the appraiser first needs to calculate several important indicators real estate, which in the future will only be substituted into ready-made formulas and produce the desired results.

Among them:

  • the amount of net benefit in case of sale of property;
  • gross income (in this situation is determined on the basis of tariffs and rates in force at the time of calculations);
  • actual (real) gross profit (calculated by subtracting from the gross income all possible losses from real estate; including possible non-payments from tenants, losses from incomplete use of objects, and so on);
  • discount rate;
  • correct calculation of all possible expenses.

To accurately determine all possible material losses for the last point, a specialist will need to divide them into several indicators and carry out calculations for each separately.

The income approach to real estate involves calculating:

  1. Fixed costs, including payments and deductions for the maintenance of the facility, which do not change over time. Often these include mortgage rates, tax payments, or property depreciation accounting.
  2. Operating costs are the costs of maintaining the facility. May change from time to time depending on the need to maintain the property in an attractive marketable condition.
  3. Unplanned expenses, including possible costs for urgent repairs or purchases.

Calculation methods

Most often, the following income approach methods are used to calculate the value of real estate:

  • direct capitalization method;
  • discounting method.

Each method has its pros and cons, as well as certain nuances, thanks to which various situations It is better to choose one specific method. To understand their features, it is necessary to consider each separately.

Capitalization of benefits

The income approach of this plan is most often used to calculate the value of a real estate property in the presence of a stable, good and long-term profit from it or in the case when the financial benefit from maintaining the property grows proportionally.

This income approach involves making calculations using a certain formula with two known ones. To obtain accurate data on the full value of the property, the appraiser needs the capitalization ratio and net operating income. The final price is determined by dividing the second indicator by the first, taken in both cases for one year. That is why stability of profit is important to obtain exact result.

Getting data for a method

In order for the income approach to calculating profit capitalization to be as close to reality as possible, it is necessary to accurately calculate all the necessary constants for substitution in the formula. Calculating net operating income can be done by subtracting operating expenses from actual gross income data other than property depreciation.

Cash flow discounting

The income approach is calculated using this method in the following cases:

  • if there is a large difference in profit in a certain period of time;
  • seasonality of profit from the facility;
  • if the building is still under construction or restoration;
  • if the real estate is a complex of buildings and not a single object.

It is more difficult to carry out calculations using this method, but it is applicable to most real estate in the country. The method includes determining the time period for the calculation and the expected profit or loss from the object during this period. For developed countries, experts most often take intervals of at least five years, and sometimes up to 10 years, but for the unstable Russian economy, indicators for 3-5 years, no more, will be more accurate. Calculation for a longer period will not reflect real indicators, and not every appraiser will undertake such work, considering it pointless.

Getting data for a method

Since this method is capable of determining the value of an object with inaccurate and unstable profit indicators from it, its calculation requires a larger number of constants to be substituted into the formula.

You need to determine:

  • potential (possible) gross income;
  • net operating income;
  • actual (real) gross income;
  • cash flow before and after taxes.

All available constants are substituted into the formula calculation of discounted cash flow :

PV=C i/(1+i) t + M * (1/(1+i) n) ,

where PV will be the result of all calculations, demonstrating the price of the object taking into account the entered indicators. Ci here represents the cash flows during a limited period of time, denoted by t, M is the residual value, and it is the discount rate of the property.

To make it easier for a person who has not previously encountered such calculations to understand the meaning of all actions, one should consider the income approach, an example of which will put everything in its place. So, let's consider a situation where the cash flow from owning real estate for the allotted time for calculation amounted to 200 thousand rubles, and the discount rate of the object is determined as 26% (in monetary equivalent it is 0.26 rubles). Based on these data, the property owner expects to receive an increase in profit by the end of the time allotted for the calculation by 4% (in the monetary equivalent of 0.004 rubles). It turns out that: PV=200/(0.26-0.004)=909.1 thousand rubles.

Positive aspects of the method

Among the advantages of the income approach, one should undoubtedly highlight the simplicity of calculations. This is actually true, because all the formulas for calculations have already been optimized and to get the result you just need to substitute your data into them. It is only important to provide them to the appraiser in accordance with the real ones, otherwise the result of the calculations will be incorrect.

The second advantage of the calculation method under consideration is its ability to reflect the real picture of the economy and the value of objects at a specific time, because to obtain a result the appraiser has to calculate a large number of indicators taking into account all possible nuances both the object itself and the market as a whole.

Restrictions on use

Mainly, only enterprises and property owners who have a stable and long-term income from their property can use this method of calculating value. That is, with a newly constructed building, it will be difficult to estimate its profit, because there are simply no initial data for the necessary calculations.

For the same reasons for the instability of indicators, the income comparative approach cannot be used to calculate during an economic crisis, which may short time radically change the market situation.

The whole essence of carrying out calculations comes down to the usual analysis of available data and drawing conclusions from them. If the appraiser does not have enough information to substitute into the formula, then making calculations immediately becomes impossible.

Grounds for refusal

Because the whole point income method Calculating the value of objects consists in knowing all the data necessary for this, then the lack of certain information may become a reason for the appraiser to refuse calculations. Also, the owner of the property can refuse the income approach by providing data in full, but not supported by documents, because the whole point of the calculation is to evaluate real information, from which conclusions are drawn in the future.

A specialist may refuse to carry out calculations using this approach for other reasons. For example, if the property is planned to be used in non-commercial purposes, which means you won’t be able to benefit from it in the future. Another reason for refusal is often the unofficially developed rental market, based on oral agreements. This also leads to the fact that there is no confirmation of data collection, which means that the result of the calculations cannot be called accurate.

Additional calculation methods

The income calculation of the value of real estate can also be carried out through residual income. This method is a calculation of the difference between the actual profit and the one predicted at the time of purchasing a building or making calculations.

IN developed countries all methods of the income approach are gradually fading into the background, being replaced by option pricing. In our country, the method is not applicable due to the lack of basic indicators for substitution in the formula, but in other countries it allows you to calculate the value of real estate or business, even if they suffer visible losses, and proving that their price is not zero for any amount of debt.

Finally

Despite the ease of calculations when calculating the value of real estate using the income approach, it is gradually losing its relevance. This is due to the complexity of calculating the data necessary for the formula, because in order to obtain an accurate result, all of it must be truthful and correct. Any deviation or approximate calculation directly affects the final result of the method.

The method is not applicable for most situations due to the development of underground accounting in our country, which does not allow appraisers to obtain valid information about a certain object.

In general, the method is very effective and is capable of calculating the real value of any real estate, small or medium-sized business or large company, but the reliability of the information provided by employees can significantly affect the results of calculations from experts. This is why many appraisers are hesitant to carry out calculations using this approach.

But be that as it may, in order to make the correct calculation, it is best to contact a trusted company where real professionals work.

Topic 7. Income method of real estate valuation.

1. Structure of the income method.

2. Fundamental Principles income method.

3. Capitalization rate, discounting rate.

4. Terms of rental payments.

5. Reconstructed income and expense statement.

6. Direct capitalization method.

7. Estimation using the residual technique.

8. Second method of capitalization.

The income method of real estate valuation reflects the motivation of the typical buyer of income real estate: expected future income with the required characteristics. Given that there is a direct relationship between the size of the investment and the benefits from the commercial use of the investment object, the value of real estate is defined as the value of the rights to receive the income it generates. This value (market, investment) is defined as the present value of future income generated by the asset being valued.

The main advantage of the income method compared to the market and cost method is that it largely reflects the investor’s idea of ​​real estate as a source of income, i.e. This quality of real estate is taken into account as the main pricing factor. The income method of valuation is closely related to the market and cost methods. For example, the rates of return used in the income method are usually determined from an analysis of comparable investments, renovation costs are used in determining cash flow as additional investments, and capitalization methods are used to adjust for differences between the market and cost methods. The main disadvantage of the method is that, unlike the other two assessment methods, it is based on forecast data.

1. Structure of the income method.

At the first stage, when using the income method, a forecast of future income from renting out the assessed space for the period of ownership is made, i.e. for the time during which the investor intends to retain ownership of the property. Lease payments are cleared of all operating periodic costs necessary to maintain the property in the required commercial condition and management, after which the value of the property at the end of the ownership period is predicted in absolute or fractional terms relative to the original cost - the so-called reversion value. On last stage Forecasted earnings and reversals are converted to present value using direct capitalization and discounted cash flow methods. The choice of capitalization method is determined by the nature and quality of expected income.

Direct capitalization is used if income is forecast to be constant or smoothly changing at a slight pace. If the dynamics of changes in income are significant or these changes are irregular, then cash flow discounting is used.

If an uncertain situation regarding future income is expected in the future, then it is also advisable to use the direct capitalization method, relying on retrospective and current data on sales and lease agreements in relation to similar objects.

The value is determined using the direct capitalization method using only two variables: the projected net annual income and the corresponding capitalization rate. The basis of the method is the fact that in conditions of free and competitive market The ratio of rental income values ​​to sales prices for each of the identified real estate objects of the same use are distributed around a certain value, which is the main indicator for choosing the capitalization rate.

Thus, value is determined by dividing the projected annual income by the market capitalization rate, which is either determined based on historical and current sales and lease information, or is calculated as the rate of return on capital adjusted to compensate for changes in the value of the original capital during the holding period.

The second capitalization method, as already noted, determines the value of real estate as the sum of the present values ​​of future income by separately discounting each of the periodic income and the projected future value of the property. In these calculations, a discount rate is used, which is the corresponding rate of return on capital, otherwise called the rate of return or rate of return.

2. Fundamental principles of the income method.

The theoretical basis of the income method is the principles of valuation, which represent a generalization of the analysis of the behavioral characteristics of participants in the real estate market and the functional relationships between prices and price-forming factors.

We present the principles that are most significant for the income method, as well as factors and circumstances, the analysis of which is based on the corresponding principle.

PRINCIPLE SPHERE OF INFLUENCE

Expectations Full range of forecast data:

(basic principle, pricing factors,

on which the characteristics of income, capital,

income estimate) coefficients

Substitutions Selection and analysis of analogue objects,

Analysis of alternative investments

Demand Accounting and analysis of factors:

And suggestions usefulness, scarcity,

Competitiveness,

Availability of the capital market,

Monopoly, state control

Business activity,

population characteristics

ultimate Analysis of the property:

productivity economic compliance of documents

(balance, deposit) real estate,

its use and type of land use

3. Capitalization rate, discounting rate.

Capitalization rate Ro used in the direct capitalization method according to the formula

Where V is the cost

NOI is a representative value of expected net operating income

The capitalization rate includes the rate of return on capital (invested funds, or initial investment) and the rate of return, which takes into account the recovery of the original funds invested.

Like any rate of return, the capitalization rate primarily reflects the risks to which funds invested in a given asset are exposed.

Discount rate(rate of return, rate of return) is used in the second capitalization method - the discounted cash flow method. The general expression for determining cost is as follows:

where i is the discount rate

FV – resale price of the property at the end of the ownership period (reversion)

N – holding period

L – payment period number

The value is defined as the sum of the current values ​​of income for each reversion period, calculated at the appropriate rate. The discount rate i is otherwise called the rate of return on investment. This value also characterizes the efficiency of capital investments. It takes into account all total income (return on investment and income from changes in the value of the asset), bringing the initial investment and the realized value into line with time and risk factors. economic effect. The discount rate should be considered taking into account the fact that the capital market, the market valuable papers and the real estate market are unified system investment instruments. The unity of this system, in particular, is determined by common selection criteria: risk and profitability. The choice of discount rate is based on an analysis of available alternative options investments with a comparable level of risk, i.e. this rate is considered as opportunity cost capital.

4. Terms of rental relations.

The basis for forecasting income from real estate is the analysis of rental relations. The appraiser or real estate analyst needs to collect all available historical and current information on leases and, based on their analysis, determine the impact of the terms contained in the leases on the characteristics of lease payments.

Let's look at the main conditions under which lease agreements may differ, although in practice the range of these conditions can be much wider. It is necessary to identify the rental conditions that are most typical for the local real estate market for a specific purpose, and make adjustments to the values ​​of contract rental rates for analogue properties to bring them to market conditions.

RENTAL CONDITIONS BRIEF EXPLANATION

AGREEMENTS

Types of rental payments

With a fixed agreement, the agreement is usually concluded on

Rental rates for short periods or at expected

Economic stability

With adjustment For accounting possible changes prices

Rent payments or property value

With percentage rental To constant rental value

Payments add a percentage of

Income generated by the entrepreneur

Telly activity of the tenant

Distribution of exploitation

Zion expenses

Gross rent All operating costs are borne by

Owner

Net rent All operating costs are borne by

Tenant

Intermediate option: Owner and tenant share the burden

Operating costs in

In accordance with the terms of the lease

Go agreements

Duration

Lease agreements

Short-term Up to 1 year

Medium term 1 – 3 years

Long-term Over 3 years

To extend the lease Represents an additional right-

Agreements with the tenant to extend the contract

Vora after the expiration of the validity period

Via current agreement

For the purchase of property rights Provides preferential

For leased real estate, the tenant has the right to purchase

So, the valuation of real estate is the determination of its market price today upon sale or the cost of using this object, for example, at. Today, it is the income approach that is the main one in real estate valuation, much ahead of and. So what is the income approach, and how can you use it to determine the value of real estate?

The essence of the income approach

When using the income approach to real estate valuation, the appraiser calculates the value based on the expected profit it will bring in the future. It can only be used if the future income and expenses associated with the item can be accurately predicted.

To use this option in real estate valuation, the appraiser must:

  1. Set the time frame for the forecast period. This time frame will be understood as a time period in the future for which, from the moment of assessment, calculations and forecasts of future income and expenses, as well as factors that may affect them, will be made;
  2. Assess how much profit real estate can generate during the forecast time period. And also draw conclusions about the further flow of income after the forecast period;
  3. Set discount rate. It is established in accordance with income-generating investments comparable to real estate that have a similar level of risk. This rate is needed to bring future profits to the time of assessment;
  4. Calculate future income stream within the established time frame and after its completion, bring these data to the amount at the time of assessment.

There are several steps to help simplify the calculation of the income approach. Algorithm:

  1. Gross income (IG) V in this case is calculated based on current, current tariffs and rates on the real estate market for similar properties.
  2. Calculation of assessment losses from incomplete use of real estate or shortfalls in payments from tenants should be made on the basis of an analysis of a given market, in a certain territory, taking into account its dynamics and nature. The calculated figure must be subtracted from the gross income to ultimately obtain the actual gross income (GIR).
  3. For the right determining costs, they should be divided into several groups and each calculated separately:
    • operating costs– costs associated with maintaining the facility;
    • fixed costs– those deductions that do not change over time, for example, depreciation, mortgage payments, tax deductions, and so on.
    • reserve costs- a certain amount that is needed in case of unplanned breakdowns or forced purchases.
  4. Calculation net profit, received in case of sale of the object.
  5. Rate calculation.

How to calculate property valuation according to the income approach

It can be produced in two ways.

  1. Direct capitalization of income.

Attention! This option is used for long-term stable and fairly high profits. Or if profit increases constantly in equal shares.

The result of this calculation will be the actual total cost of the property.

C = CHOD/KK,

where C is the price of the object (expressed in monetary units);

CC – capitalization ratio (in percent);

NOR – net operating income.

So, then it turns out that the direct capitalization method comes down to bringing the annual NPV to the current value.

This option cannot be used if the profit is uneven and inconsistent or if the property is not yet owned.

Algorithm for calculation this method will be as follows:

  1. Calculate how much net annual income the real estate will generate with its most efficient use.
  2. Calculate the capitalization rate.
  3. Calculate the price of the property using the formula.
  1. (DDP).

It is more complex for calculations than the previous one. The method is applicable in the following cases:

  1. difference in profit flows over a certain time period;
  2. seasonality of income and expenses of the property;
  3. the property being assessed is not one object, but a multi-level and multifunctional complex;
  4. the object may be under construction or renovation.

Calculation algorithm according to this method The following points can be mentioned:

  1. Determining the time frame. International standard in this matter is 5 – 10 years, within the Russian market – 3 – 5 years.
  2. Calculation of expected cash flows.

To calculate expected flows, calculate:

  • potential gross income;
  • pre-tax cash flow;
  • after-tax cash flow;
  • actual gross income.

Using this method, the value of real estate is calculated:

PV – current value;

Ci – cash flow of period t;

It – discount rate;

M – residual value.

An example of the calculation of such problems can be the following situation. Let’s assume that the cash flow for 12 months at the end of the time frame was 200 thousand rubles, the discount rate was 26%, and the owner believes that at the end of the forecast time period, income growth will stabilize and amount to 4% per year. How much will the enterprise cost?

In this case, the future price of the enterprise will be determined using the formula:

In total, we find that at the end of the predicted time frame, the cost of real estate will be 909.1 thousand rubles.

Pros and cons of the income approach

To the main and undoubted advantages This method, of course, includes ease of calculation. Quite simple and optimized formulas help to carry out the assessment quickly and painlessly.

Attention! The second advantage is that this method helps reflect the market situation and shows it clearly. This happens because to evaluate real estate using this method, the appraiser must analyze a huge number of contracts and other documents confirming market transactions, review their amounts and make a conclusion.

This method also has several limitations:

  1. Using this method cannot be used in times of crisis, since it is initially assumed that the profit will flow evenly and constantly throughout the entire time period. And an economic crisis may disrupt these payments, thereby affecting the income generated by the property in the future.
  2. Also this method cannot be applied in conditions of lack of information. Its whole essence comes down to the analysis of processes occurring in the market and conclusions from them about obtaining future profits. If the appraiser cannot obtain this or that information or it simply does not exist, then this method cannot be applied due to the impossibility of making calculations.
  3. This method cannot be used for a new business opening, since the level of his profit cannot be constant and has an abrupt form. It also cannot be used during the period of reconstruction or anti-crisis proposal of the company, since this data cannot be permanent.

Attention! This method is the most convenient only for those companies and firms in which profits come from evenly and constantly.

On what basis can one refuse the income approach to real estate valuation?

This method examines real estate objects from the outside and their attractiveness.

That is, what income can you count on in the future. Do not forget that without some data, for example, capitalization rates, or ignorance of the situation on the market, the percentage of reliability of the resulting future profit values ​​is significantly reduced.

The rules for applying the income approach state that you can rely on it only if you have complete and, most importantly, reliable information about the forecast of future income and expenses.

So, if during the assessment period the appraiser does not have this information or it is not in full, and therefore it is impossible to reliably predict future cash flow, then this may serve as a basis for refusing to apply the income approach.

There are other grounds for refusal. Firstly, it may be information provided by the owner of the real estate that the object will be used for residential purposes only, that is, it will be impossible to obtain any commercial benefit from this object, and, accordingly, it will be impossible to predict it.

Secondly, if the housing rental market is not developed in the city, and if it is developed, then it is underground, without registration and proper execution of contracts, and the appraiser cannot collect enough truthful information about the rental price, he also has the right to refuse this method. So it is always necessary to rely on reliable and truthful information.

Expert consultation

The video below is a clear and energetic presentation of the topic. About principles and necessary conditions Analyst Boris Gorodilov talks about using the income approach.


MINISTRY OF FINANCE OF THE RUSSIAN FEDERATION

FEDERAL STATE EDUCATIONAL INSTITUTION

HIGHER PROFESSIONAL EDUCATION

"ALL-RUSSIAN STATE TAX ACADEMY

MINISTRY OF FINANCE OF THE RUSSIAN FEDERATION"

Discipline: “Real Estate Valuation”

Income approach to real estate valuation

Completed by: Skorodumova O.Yu.

Specialty: taxes and taxation

Group: NZ - 401

Moscow 2009

Introduction

    Characteristics of the income approach

    Determination of net operating income

    Capitalization theory and capitalization ratios

    Direct capitalization

    Methods for calculating capitalization rates

    Discounting income stream

    Valuation using the residual technique

    PROS AND CONS OF USING THE INCOME APPROACH

Conclusion

Literature

Introduction

Currently, real estate is one of the necessary resources (along with human, financial, material, technical and information resources) to ensure the effective operation of a joint stock company, state and municipal owner and, finally, the normal life of each individual individual.

At the same time, real estate is the most important property component of the owners. According to its estimated value, real estate is up to 30-40% (of course, there are a number of modern areas of activity where real estate is used minimally, for example, in small businesses, in online stores, etc.)

Therefore, real estate valuation is important and relevant in modern stage development. Valuation of movable property is also important both for taxation purposes and for the purposes of purchase and sale, pledge, lease, etc.

There are several methods for assessing real estate and other property of enterprises. Such as: income, comparative, cost and property approaches to the valuation of real estate and other property. In this paper, I discuss the income approach to real estate valuation, used to value income-producing real estate.

          CHARACTERISTICS OF THE INCOME APPROACH

The income method is based on the expectation principle, which states that the typical investor or buyer purchases real estate in anticipation of receiving future income or benefits from it, that is, it reflects:

    the quality and quantity of income that the property can generate over its life;

    risks both specific to the object being assessed and to the region.

Thus, the value of an asset can be defined as its ability to generate income in the future. The time factor operates here, and the amount of future income must be reduced to the zero point in time by capitalizing income and discounting.

The theoretical basis of the income approach is the principles of valuation, the most significant of which, as well as factors and circumstances, the analysis of which is based on the corresponding principles (Fig. 1)

Principle Sphere of Influence

EXPECTATIONS

(the basic principle on which income assessment is based)

Pricing factors

Income characteristics

Characteristics of capital

Odds

SUBSTITUTIONS

Selection and analysis of analogue objects

Analysis of alternative investments

SUPPLY AND DEMAND

Accounting and analysis of factors:

utility;

scarcity;

competitiveness;

accessibility of the capital market;

monopoly, state control,

business activity;

population characteristics

ULTIMATE PRODUCTIVITY

(balance, deposit)

Analysis of the property:

economic compliance of real estate elements;

its use and type of land use

The main advantage of the income approach compared to the market and cost approach is that it largely reflects the investor’s idea of ​​real estate as a source of income, that is, this quality of real estate is taken into account as the main pricing factor. The income approach to valuation is closely related to the market and cost approaches. For example, the rates of return used in the income approach are usually determined from an analysis of comparable investments; reconstruction costs are used in determining cash flow as additional investments; capitalization methods are used to adjust for differences between the market and cost approaches.

The main disadvantage of the income approach is that, unlike other valuation approaches, it is based on forecast data.

Within the framework of the income approach, two methods can be used:

    direct capitalization of income;

    discounted cash flows.

The advantages and disadvantages of the methods are determined according to the following criteria (Fig. 2)

Criteria for comparing income approach methods

The ability to reflect the actual intentions of a potential buyer (investor)

The type, quality and breadth of information on which the analysis is based

Ability to take into account competitive fluctuations

Ability to take into account specific features object that affects its value

location

potential profitability

These methods are based on the premise that the value of real estate is determined by the ability of the property being valued to generate income streams in the future. In both methods, future income from a real estate property is converted into its value, taking into account the level of risk characteristic of this property. These methods differ only in the way they transform income streams.

When using income capitalization methods, income for one time period is converted into the value of real estate, and when using the discounted cash flow method, income from its proposed use for a number of forecast years, as well as proceeds from the pre-sale of a property at the end of the forecast period, are converted.

          DETERMINATION OF NET OPERATING INCOME

For rate full rights property and tenant rights, net operating income (NOI) is calculated as an income stream.

A real estate appraiser works with the following income levels:

Potential Gross Income (GPI)

Actual Gross Income (DVD)

Net operating income (NOI)

Potential gross income (GPI) is the income that can be received from real estate if it is used 100% without taking into account all losses and expenses. Potential gross income depends on the area of ​​the property being valued and the established rental rate and is calculated using the formula:

PVD= S x Ca

Where S is the area for rent, m2;

Ca - rental rate per 1m2

The rental rate depends on the location of the property, its physical condition, availability of communications, lease term, etc.

There are two types of rental rates (Fig. 3)

contractual



market


The market rent is the rate prevailing in the market for similar properties, and is the most likely rent that a typical landlord would be willing to rent and a typical tenant would be willing to lease the property, which is a hypothetical transaction. Market rental rates are used to value freehold ownership, where the property is essentially owned, operated and enjoyed by the owner himself: what would be the income stream if the property were rented out.

The contract rental rate is used to value the lessor's partial property rights. In this case, it is advisable for the appraiser to analyze lease agreements from the point of view of the terms of their conclusion.

According to the types of rental rates, lease agreements are divided into three large groups:

    with a fixed rental rate (used in conditions of economic stability);

    with a variable rental rate (revision of rental rates during the term of the contract is carried out, as a rule, in conditions of inflation);

    with an interest rate (when a percentage of the income received by the tenant as a result of the use of the leased property is added to the fixed amount of rental payments).

It is advisable to use the income capitalization method in the case of concluding an agreement with a fixed rental rate; in other cases, it is more correct to use the discounted cash flow method. To assessment real estateAbstract >> Economic theory

ON THE COURSE: “Economics real estate" ON THE TOPIC: “Structure and principles profitable approach To assessment real estate" OPTION-25 Work... in various market segments. Profitable an approach is used for assessments real estate, generating income. It is based...

  • Approaches To assessment real estate (1)

    Study Guide >> Economics

    Problematic assessments land plots in Russia. 3. Profitable an approach Profitable an approach based on the fact that the cost real estate, ... Basic formula profitable approach(IRV - formula): V=I/R real estate price grade where V is the cost real estate, I - ...

  • Profitable an approach To assessment business value

    Abstract >> Economic theory

    PROFITABLE AN APPROACH TO ASSESSMENT BUSINESS COST This chapter is devoted to the most popular methods assessments enterprise value - methods... assets includes several stages: 1. Evaluated real estate property of the enterprise at a reasonable market...

  • Grade real estate and property

    Test >> Finance

    Cash flow in the remaining period. Grade cost real estate. Profitable an approach V assessment real estate based on the determination of present value...

    • The income approach, in contrast to the comparative and cost approach, is aimed at obtaining data about the property from the investor’s point of view. In this case, the property is considered only as a source of income. The disadvantages of this approach include the construction of all calculations based on forecast data and preliminary expert opinions.

    Economic content of the income approach

    The income approach involves converting future income streams into their present value. General algorithm calculations when using the income approach of valuation involves performing five operations (Fig. 1.3.6):

    1. Definition future gross income. Based on data from the annual balance sheets of income and expenses of the enterprise for the last 3 years, the appraiser

    determines gross income. This determines:

    · potential gross income, i.e., the income that an object can bring in a year when the space is fully occupied before operating costs are taken into account. Thus, potential gross income represents the expected total amount from the main activity on the property being valued;

    · actual gross income based on potential gross income, from which losses in collecting payments are subtracted and additional income from the property is added (for example, from entrepreneurial activity on or within the property).

    Rice. 1.3.6 Algorithm for calculating the income approach to real estate valuation

    For example, if the cost of a hotel is assessed, then the owner’s income will consist of the cost of: rooms, restaurant services, cleaning and laundry services, rent for installed kiosks and shops. The appraiser must take into account the development potential of the entrepreneur and reflect it in his report. The buyer should know that he can increase income through better management, financial control, the involvement of new production facilities and other factors. Additional features income generation is usually taken into account by stakeholders in the process of assessing present value.

    2. Subtracting transaction costs. The appraiser analyzes the operating expenses that are reflected in the enterprise's balance sheet. this type of costs reflects the costs necessary to maintain the functional suitability of the object, ensuring the receipt of gross income.

    Operating costs are usually divided into:

    • conditionally permanent, independent of the degree of exploitation of the property (property tax, insurance premiums etc.);
    • conditional variables that change depending on the degree of use and load of the object (fee for public utilities, cleaning, garbage removal, etc.);
    • replacement reserves - to replace during the economic life of the real estate its individual elements (structural, operational and interior), especially those that are most susceptible to wear and tear (for example, roofing, plumbing, elevator equipment).

    In the case of hotel valuation, operating costs include the following expenses: the cost of a hotel room, salaries of staff and administration, advertising costs, repairs and taxes. All expenses, with the exception of depreciation and loan costs, are deducted from gross turnover to determine net income.

    3. Determination and adjustment of net (operating) income. The adjustment of that income depends on the entrepreneur. Let's say 70% of the income will go to pay for rent and other production expenses, in this case the entrepreneur can receive up to 30% of the gross income in the form of remuneration. At high level competition, the entrepreneur's income may decrease.

    Note that net income does not take into account loan servicing costs and depreciation charges.

    4. Valuation and goodwill multiplier. Goodwill (Oxford Dictionary in English) is defined as “the privileges transferred by the seller of a business to the buyer; a list of clients or customers recognized as a separate element of the value of the business.” International Standards Committee accounting believes that goodwill is it is the difference between the value of the business as a whole and the market price of its assets. Both definitions characterize the additional value obtained as a result of the individual characteristics of the business and added to the value of the property being valued.

    To determine the value of a potential owner's goodwill, the appraiser must perform a number of operations (Fig. 1.3.7).

    Fig. 1.3.7 Procedure for determining the value of goodwill

    5. Determination of the final value of real estate. In this case, the following methods can be used: capitalization of income (direct capitalization); discounted cash flows and balance techniques.

    Functions of compound interest

    To understand the essence of methods for assessing income-producing real estate, it is necessary to consider the functions of compound interest, which characterize quantitative changes in the value of money over time. These functions include:

    1. Future value of a unit investment- the value of the future value of the monetary unit of the property after n periods:

    ,

    where is the initial deposit, rub.; E – actual compound interest rate.

    2. Current value of a single investment- today's value of money

    units of real estate received after n periods at given i percent per annum:

    .

    Z. Current value single investments for the period- the present value of a series of future equal unit payments over n periods at the compound interest rate i:

    ,

    where P - a known stream of equal payments at the end of each period, discounted at a given rate.

    4. Future value of a single investment over a period- the future value of a series of future equal unit payments over n periods at the compound interest rate i:

    .

    5. Depreciation of a single investment- shows what the size of payments should be over n periods so that their present value at interest rate i is equal to 1:

    b. Compensation fund- the amount of equal payments accumulating 1 monetary unit on the account by the end of the annuity period:

    Basic assessment methods

    Direct capitalization method used if constant or smoothly changing income is forecast. This method is based on the determination of the capitalization rate, which is a capitalization ratio that takes into account both the net profit from the operation of the property being valued and the reimbursement of capital spent on its acquisition.

    IN general case The capitalization rate is determined by the formula:

    Capitalization rate =

    There are other methods for calculating the capitalization rate:

    1. Direct matching method consists in comparing the assessed object with an analogue object. The main characteristics of the objects are compared (see, for example, 10.3), on the basis of which the similar object(s) are selected. The capitalization rate of the valued object is taken to be the same as the analogous object or is calculated on the basis of the arithmetic average in the case of many analogous objects.

    2. Linked investment method (equity and debt capital) used to purchase real estate using both borrowed and equity capital:

    a) the capitalization rate on borrowed funds (mortgage constant) is determined by the ratio of annual debt service payments to the principal amount of the mortgage loan;

    b) capitalization rate for own funds(capitalization rate of equity capital) is determined by the ratio of the portion of net profit from the operation of the property attributable to equity capital to the amount of equity capital.

    The overall capitalization rate is determined by weighing it components in proportion to the size of debt and equity capital in the total amount of invested capital. The component of borrowed capital is defined as the product of the mortgage constant and the ratio of the amount of borrowed capital to the total amount of invested capital. The equity component is defined as:

    Capitalization rate

    on equity =

    3. Linked investment method (land and buildings) is used when it is possible to accurately calculate capitalization rates for each component of the property complex: a building (structure) and a land plot. The essence of the method is to determine weighted capitalization rates for land and the property standing on it. Weighting of capitalization rates is carried out depending on the shares of these components in the total cost of the property complex.

    4. Ellwood method is a modified method of linked investments (debt and equity), taking into account the duration of the investment period and changes in the value of the property over time.

    To calculate the total capitalization rate, Ellwood proposed a formula:

    ,

    where is the overall capitalization ratio; - rate of return on equity capital; M – share of borrowed capital; C – Ellwood mortgage ratio.

    In practice, calculation tables are used, with the help of which, for a given interest rate, return on equity capital and holding period, the value of the mortgage coefficient C is determined.

    5. Cumulative method takes into account in the capitalization rate adjustments for risks associated with investment investments, ineffective investment management, low liquidity of funds, etc. In addition to receiving profit in the form of interest on capital investment, it can also take into account the time of compensation (return) of the invested capital, i.e. to the received the rate must be added to the capital replacement rate. It is calculated as the ratio of one to the number of years.

    The essence of the method is that the rate is divided into parts, and if the values ​​of all its components are known, then by summing it is possible to obtain the capitalization rate.

    The direct capitalization method is based on the fact that income from the use of the property and proceeds from its resale are capitalized into the current value, which will be the value of the property.

    General formula to determine the value of a property using the direct capitalization method is as follows:

    In the case of transferring a property for rent, the formula takes on a slightly different form, since the direct capitalization method in this case will be identified with the cost of rent for a number of years of operation of the property. This method is called “capitalization of the annual rent”.

    Capitalization of the annual rent depends on the individual assessment and risk of receiving the rent:

    where is the cost of the valued object, calculated using the income approach; BH – net income; Г – number of years of lease of the object; - rent capitalization ratio, calculated as the ratio of the amount of net income to the amount of annual rent ().

    6. Discounted Cash Flow Method is used when the dynamics of changes in income are significant or these changes are irregular.

    Using this method assumes:

    1. Establishing the duration of receipt of income from the property. In international valuation practice, the average duration is taken to be 5-10 years, unless otherwise provided additional conditions. Russian appraisers accept this period in the range of 3-5 years

    2. Forecasting the amount of cash flows: building trends in cash flows of income and expenses, frequency of income. If expenses are envisaged for the reconstruction or modernization of a real estate property, then their amount is deducted from the net income in those periods when they occur.

    H. Determination of the discount rate.

    The discount rate is a compound interest used in calculating the present value of future payments. To determine are used various methods: construction, comparison of alternative investments, allocation, movitoring.

    Construction method is based on the premise that the discount rate is only a function of risk and can be defined as the sum of all risks associated with the acquisition, operation of real estate and other operations (risks of the real estate market, capital market, low liquidity, inflation, property management, financial, environmental, legislative).

    At the core method for comparing alternative investments lies the provision that projects with similar risks should have similar discount rates.

    Selection method assumes that the discount rate is calculated based on data on completed transactions.

    Using monitoring method, it is possible to identify trends in the profitability of alternative investments related to the profitability of the property.

    This analysis makes it possible to predict changes in the probable profitability of a property based on monitoring of the real estate market, the results of which are officially published.

    1. Discounting cash flows by reducing the cost of the flow Money future periods to the present based on the functions of compound interest and the summation of all current values.

    The calculation involves discounting each cash flow at the corresponding discount rate and then adding all the resulting values:

    where is the cash flow of period t; - cash flow discount rate for period t.

    2. Addition of the current values ​​of income streams and sales proceeds.

    H. Calculation of the value of a real estate asset as the difference between the current amount of income for the billing period and the amount of borrowed funds.

    Residue technique involves capital income, which relates only to one of the components of the funds invested in the property, while the value of the other components is known.

    The cost of a property is considered in the following order:

    1. The portion of income for the period is calculated. necessary to attract investment in a component with a known cost, by multiplying the capitalization rate by the value of the cost.

    2. The amount of income that falls on the second component (unknown) is determined by subtracting the income that falls on the first component from the total income.

    H. The value of the second component is determined by dividing the income attributable to it by the corresponding capitalization rate.

    4. The value of the property is determined by adding the value of the known component and the calculated value of the unknown component. Based general ideas about the income approach, for each individual property, one or another group of principles and methods of assessment can be used, depending on the purpose of this assessment. For example , income approach to land valuation involves the use of principles and methods that allow the valuation of a land plot based on expected income. These are the principles of expectation, supply and demand, substitution in the methods of direct capitalization, capitalization of income by period, and the income balance technique.

    The direct capitalization method is based on determining income from land ownership. The estimated value of land is determined by dividing the net income by the capitalization rate. The method is convenient when valuing a land plot if it is leased separately from buildings and structures, when the tenant is responsible for paying property taxes and other expenses. If the terms of the lease agreement sufficiently accurately reflect the situation in the rental market, then it is possible to directly capitalize the amount of net rent into land ownership.

    The basis for determining income when using this method can be:

    Rent for the valuation of agricultural and forest land;

    Part of the income from the enterprise as a property complex attributable to the developed land plot;

    Rent for assessing settlement lands;

    Income from the increase in the value of a land plot, received when it is sold in the future or when it is pledged against a mortgage loan, etc.

    Currently, there are three methods for calculating the capitalization rate:

    1. A plot of land is considered as a type of monetary capital. Based on this, the capitalization rate is calculated based on the characteristics of the money market at the valuation date. The All-Russian Research Institute of Economics, Labor and Management in Agriculture recommends using the Sberbank of the Russian Federation rate for long-term foreign exchange transactions as the capitalization rate.

    2. Cumulative method, in which the capitalization rate may include:

    Risk-free rate (for example, the interest rate of Sberbank of the Russian Federation);

    Liquidity risk associated with the possibility of losses during the sale of real estate due to the underdevelopment or instability of the real estate market, etc.

    H. Direct comparison method, in which the capitalization rate is equal to income divided by the sales price of a similar property.

    When applying the income capitalization method by periods, annual income streams for the entire holding period are determined and reduced to their current value.

    To evaluate land plots built up with commercial real estate, the technique of the residual income attributable to the land plot is used. The land income residual technique is used in cases where buildings and structures are recently built or not yet built (a feasibility analysis of new construction is carried out), as well as when determining the best and most effective use land plot.

    The remaining income after covering all costs of attracting various resources (capital, labor, management resources) relates to the land plot.

    Loading...Loading...