In the real estate industry, when we think of a “real estate investment”, we tend to think of commercial or rental real estate, vacant or partially developed ground to be built upon, a foreclosed home to be remodeled and sold, or something similar. However, in one fashion or another, money used for any purpose related to real estate is considered an investment.
An essential component to determining the future benefits of your investment is understanding the current value of the real estate. One of the most effective methods to determine the benefits of your investment is Yield Capitalization.
What Is Yield Capitalization?
Yield capitalization is a technique that converts the future valuation anticipated by a real estate investor into the present value of the real estate or real property. These benefits consist of two types, which are listed below.
Periodic Cash Flow
Periodic cash flow from the operation of the property, which is the net operating income (NOI) or the net cash flow. (They do not include depreciation or the effect on the landlord’s income tax, unless an after-tax analysis is the object of the study).
The cash flow from the sale of the property (called the reversion) at the end of the projected holding period, which represents the proceeds from the resale of the property, after all costs incurred to effect the sale are paid.
Written and Published by: VanEd