Question

A newly built house is let out for rent of Rs.1,000 per month inclusive of all taxes. If outgoings are at 20% of the gross rent and the expected rate of return is 10%, what is the capital value by the rental method of valuation?
1. Rs.99,600
2. Rs.87,600
3. Rs.96,000
4. Rs.1,12,300

Answer 1

Correct Answer - Option 3 : Rs.96,000

Concept:

Valuation:

It is the technique of estimation or determining the fair price or value of the property such as building, a factory, other engineering structures of various types, land, etc. By valuation, the present value of a property is defined.

Rental Method of Valuation:

The capitalized value of the property is worked out as under:

Net Rent = Gross Rent - Outgoings

Capitalized Value = Net Rent \(\times\) Year's Purchase

Year's Purchase(YP):

It is defined as the capital sum required to be invested in order to receive an annuity of Re 1.00 at a certain rate of interest.

\(YP = {1 \over (i+S)} or{1 \over (i)} \)

Where  i = rate of interest, and S = Sinking fund coefficient

Calculation:

Gross Rent = 1,000 per month

Gross Rent = 1000 \(\times\) 12 = 12000 per year

Outgoings =  20% of the gross rent = 12000 \(\times\) 0.20 = 2400

Net Rent = Gross Rent - Outgoings = 12000 - 2400 = 9600

Year's Purchase(YP)

i = 10%

\(YP = {1 \over (i+S)} or{1 \over (i)} = {1 \over 0.10}\) = 10

Capitalized Value = Net Rent \(\times\) Year's Purchase = 9600 \(\times\) 10 = 96000

Capitalized Value = Rs 96,000