A newly built house is let out for rent of Rs.1,000 per month inclusive of all taxes. If outgoings are at 20% of gross rent and expected rate of return is 10%, what is capital value by rental method of valuation?

Concept:

Valuation:

It is the technique of estimation or determining the fair price or value of the property such as building, a factory, other engineering structures of various types, land, etc. By valuation, the present value of a property is defined.

Rental Method of Valuation:

The capitalized value of the property is worked out as under:

Net Rent = Gross Rent - Outgoings

Capitalized Value = Net Rent $\times$ Year's Purchase

Year's Purchase(YP):

It is defined as the capital sum required to be invested in order to receive an annuity of Re 1.00 at a certain rate of interest.

$YP=\frac{1}{(i+S)}or\frac{1}{(i)}$

Where  i = rate of interest, and S = Sinking fund coefficient

Calculation:

Gross Rent = 1,000 per month

Gross Rent = 1000 $\times$ 12 = 12000 per year

Outgoings =  20% of the gross rent = 12000 $\times$ 0.20 = 2400

Net Rent = Gross Rent - Outgoings = 12000 - 2400 = 9600

Year's Purchase(YP)

i = 10%

$YP=\frac{1}{(i+S)}or\frac{1}{(i)}=\frac{1}{0.10}$ = 10

Capitalized Value = Net Rent $\times$ Year's Purchase = 9600 $\times$ 10 = 96000

Capitalized Value = Rs 96,000