Rental Values and Capital Valuation

Rental Values and Capital Valuation Methods: Methods of Assessing Rental Value: Assessing rental values does not only involve several methods but it's also an intricate and testing process to both academicians and practitioners. it's a difficult and demanding process because it encompasses scrutinizing the rental property, market conditions and neighborhood characteristics. The rental housing market is considered to be both imperfect and inefficient given that the product is long-term, set on a particular site, varied and managed by wide-ranging governmental regulations.

The market conditions of an area are not necessarily the actual representation of other market conditions given that every rental housing market is limited to a particular area. Assessing the rental value helps in determining the fair rental value which is the amount that an educated and willing renter would pay in a competitive market.

The fair rental value that is determined after the assessment can also be considered as the amount which an informed and educated renter would accept for the short-term use and gratification of the property ("Rental Value," n.d.). The various methods of assessing rental value should help in the scrutiny of factors that establishes market rents of a given area.

There are some two major methods by which rental values are assessed which are & #8230; Multiple Regression Method: This is the first and traditional method by which rental values are assessed and is considered as a parametric technique that requires the client to identify the practical form of the solution. This method has been used primarily to scrutinize the price manners of rental houses in the existing literature.

The multiple regression method is however associated with many difficulties in assessing rental values because of the requirement of the user to specify the practical form of the solution. In cases where the user is ignorant of or cannot estimate the primary form of the practical relationship, the technique provides results that are in inaccurate models. Notably, this method of assessing rental values permits the use of a very common polynomial equation in situations where the practical relationship is likely to be nonlinear (Kim & Nelson, 1996).

However, the application of this method in the assessment of rental values makes it practically impossible to approximate all coefficients since the basic number of all the coefficients to be estimated increases. The number of the coefficients to be approximated continues to increase factorially because of the increase in the number of variables and function degrees. The major difficulty associated with this method is that the survey data used are usually erroneous, partial and unclear leading to inaccurate results.

Abductive Learning Networks (ALN) Method: This is the second method by which rental values are assessed and can be used to overcome the various challenges that are associated with the multiple regression method. This technique uses both the arithmetical functions for numeric knowledge representation and a synthetic neural network formation to simplify the learning of practical models. Simplifying the assignment of learning practical models is made possible by subdividing multifaceted problems into smaller ones.

The neural network incorporates various processing units and units' interconnections that are organized in a mode that looks like neurons and synapses of the human brain. This network gets its power not only in its ability to crumble multifaceted problems into simple and smaller problems but also in its ability to solve these smaller problems. The Abductive Learning Networks method uses an efficient computer-based algorithm known as the Abductory Induction Mechanism that automatically combines network models from a catalog of input and output variables.

The network incorporates arcs and nodes with each node consisting of special multivariable configurations like the normalizers, singles, white, doubles, unitizers, triples and wire elements. Unlike the multiple regression method, the Abductive Learning Networks method allows the automatic and inductive learning of coefficients, network elements and connectivity. Capital Valuation Methods: There are several methods of capital valuation that are usually used in the valuation of property.

In most cases, capital valuation methods involve seeking an expert's opinion for purposes that are linked to mortgages, probate, compulsory valuations and insurance policies among others. These experts or chartered surveyors use the following five main methods for capital valuation & #8230; The Investment Method: This is the first and most common method of capital valuation that is applied in commercial property valuation. The method incorporates translating a property's income flow or rent into a suitable capital sum.

In this case, the capital value of the commercial property is directly linked to its producing power of income. Therefore, Value = Rent * Years Purchase with the year purchase being the multiplier that translates rental income to capital sum. For example, if rent is $200,000 and Years Purchase is 10, therefore Value = Rent * YP (200,000*10) = 2,000,000. The Comparison Method: Being a method that applies to capital values, the comparison method that is also known as the comparative method of valuation is primarily used for residential property.

The method is used for properties that are purchased for occupation purposes rather than investment purposes. Moreover, the direct assessment of capital values is usually utilized for valuing properties that are vacant. However, the realization of a fair comparison involves the careful evaluation of any difference between the capital values of properties and considering the pros and cons of every property ("An Introduction," n.d.). For example, to determine the value of a vacant farm house and land, the value of similar farm houses and land are used.

Value of this farm house and land = (Size of land*value per Hectare) + Farm house = (400*8000) + 700000 = 3,900,000 The Costs Method: This method works with the assumption that a prospective buyer would be ready to pay a similar amount as it would cost him/her to purchase the same property elsewhere. The value in this method that is also known as the contractor's method consists of the land value and the replacement cost of the building. Basically, the Value of Existing Property = Cost of Site + Cost of Building -- Depreciation Allowance.

The cost of site is determined by the value per hectare, the cost of the building is currency multiplied by square meter and the depreciation value is the percentage of the construction cost. Value of the property = Cost of Site + Construction Cost -- Depreciation Allowance.