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in evaluating the freehold interest of the property, we must consider the net rental income alongside the present value of the investment.
the property is currently let out for $50,000. to find the yearly income from this, we must deduct any expenses related to maintaining and managing the property. suppose these expenses total $10,000 annually; this leaves us with a net income of $40,000.
the capitalization rate, reflecting the interest rate of 5%, allows us to calculate the current value of future income. dividing the net income by the capitalization rate gives us an estimate of the property’s value, or capitalization: $40,000 / 0.05 = $800,000.
comparing this to the property's FDV of $500,000, it appears the property might be undervalued, assuming our expense assumptions hold true. 0 reply
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