How can you determine the value of your property by taking into consideration, the prospective rental income which it is capable of producing?

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Valuation by Rental Prospects
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)

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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
 Returns from only Rental Component as compared to the overall investments:
= 41.12%
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 Horizon  ------RealT
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Purchase Cost 2000.00
Maintenance 400.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
Total 2400.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 3400.00
Rental Income 84.00 90.72 97.98 105.82 114.28 123.42 133.30 143.96 155.48 167.92 181.35
Appretiation
Total 84.00 90.72 97.98 105.82 114.28 123.42 133.30 143.96 155.48 167.92 181.35 1398.22
Investments
Returns