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Direct Capitalization: It Might Be Simple But It Isn't That Easy

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  • David C. LENNHOFF

Abstract

Of the two basic income capitalization models, direct capitalization and yield capitalization, direct capitalization is usually the preferred method, as it is perceived to be simple. With direct capitalization, all that is required is an estimate of one year's income for the subject and an overall capitalization rate. The capitalization rate is often best developed by extracting it from sales comparables. The process is simple: divide one year's income for the sale by its sale price. The technique isn't easy, however, as the capitalization rate must match the market's expectations for upside potential and risk with the subject's forecasted performance. This article explores the considerations necessary to proper development of the rate.

Suggested Citation

  • David C. LENNHOFF, 2013. "Direct Capitalization: It Might Be Simple But It Isn't That Easy," The Valuation Journal, The National Association of Authorized Romanian Valuers, vol. 8(1), pages 42-59.
    • Handle: RePEc:vaj:journl:v:8:y:2013:i:1:p:42-59
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    JEL classification:

    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General

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