16634 Lecture Notes - Lecture 1: Gross Income, Income Approach, Cash Flow

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The valuation of income producing property is normally assessed by the capitalisation of the net return/rental achieved from the property. This method is termed the capitalisation or income approach. It considers expected monetary returns from a property, in the light of the return on investment currently being demanded by investors. This is the process by which the present value of future income is expressed as a capital sum. The sum to be found is that at which the annual rate of return or interest appropriate to the class of investment will be provided by the net rent or income. One hundred (100) represents the mathematical equivalent of perpetuity. Critical assumptions about income: annually in arrears; in perpetuity. To apply the capitalisation method of valuation, careful determination of the following must be made: The net income of the property - before any interest but after the deduction of all operating expenses. The remaining economic life expectancy of the property.

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