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 the gross rent and the expected rate of return is 10%, what is the capital value by the 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 × 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. or Where i = rate of interest, and S = Sinking fund coefficient Calculation: Gross Rent = 1,000 per month Gross Rent = 1000 × 12 = 12000 per year Outgoings = 20% of the gross rent = 12000 × 0.20 = 2400 Net Rent = Gross Rent - Outgoings = 12000 - 2400 = 9600 Year's Purchase(YP) i = 10% or Capitalized Value = Net Rent × Year's Purchase = 9600 × 10 = 96000 Capitalized Value = Rs 96,000