Broker formula

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The broker formula is a simplified form of the capitalized earnings method for determining the market value of a property in the context of property valuation .

The annual net income of the property (gross rental income after deducting all operating and administrative costs ) is divided by the capitalization interest. The capitalization interest rate reflects the expected return and the risk. A high capitalization rate corresponds to a high return expectation and a high risk . Common capitalization rates are 4% to 5% for residential real estate and 6% to 8% for commercial real estate . Recently, however, capitalization rates have dropped to 3% to 4%. This development reflects the current low interest rate situation and the current flight into real assets.

Mathematically, the brokers formula corresponding perpetuity .

The broker formula disregards the remaining useful life of the property and assumes an unlimited total useful life . The determined value tends to be too high.

Example: Annual net income € 100,000 / 5% = € 2 million.