In our post - Valuation
of Real Estate: How can you value your RealT?, we discussed about various
parameters one should consider while valuing a RealT property. Today let’s
discuss about one of the technical tools of valuation which forms a vital
component of this process.
Today we will discuss about a
monetary parameter of valuation. We will take a simple real-life case study and
show how ‘Rental Income’ played its role in constituting the value of that
asset.
Before we begin, let’s make some
validated assumptions. We are saying ‘validated’ because the case we are
discussing here is a real life case.
Case Study: Rental income from an asset in Civil Lines, Kota (India) [Places’ names have been changed deliberately]
An asset was bought by a person, 10
years back, in a posh locality in Kota, Rajasthan (India). Following are the
assumptions:
Purchase
Price
|
INR 2 million
|
Upfront
Investment in Maintenance
|
INR 400,000 (20% of purchase price)
|
Yearly
Maintenance Cost
|
INR 100,000 (5% of purchase price)
|
Initial
Rental Income
|
INR 7,000 (Validated from Case Study)
|
Appreciation
in Rental Income per annum
|
8% (General practice, as well as
validated)
|
We are not taking into account
the time-value-of-money & the appreciation in the asset’s value over the time.
This is just to keep the things simple and calculate the impact of only Rental
Income as compared to the investments in the asset.
Following are some basic calculations
of total Investments and Returns in the form of Rentals:
 |
| All figures in INR '000. Click to enlarge. |
This figure shows that this
person has recovered his 41% investment in the property, just by rental
incomes! He didn't have to do anything in earning this revenue.
Beauty of Rental Income
The above discussed case study
clearly shows that Rental Income indeed forms a vital component in the overall
valuation of any asset. It is just like dividend investing: you keep on getting
recurring returns on your invested money, leave aside the appreciation in the
asset.
So next time you think of
investing somewhere, just evaluate whether or not that asset is capable of
generating recurring returns in the form of rental income!
------ Thanks for reading RealT Horizon J ------
