Question

An income-producing property will be held for a five-year period. With an income capitalisation approach, what will you be using to estimate its value at the end of the holding period?

Answer 1

In the income capitalisation approach, future cash flows and potential capital gains are used to estimate an income-producing property's value at the end of a five-year period, by discounting expected income to present value and estimating the sale price including capital gains.

Step-by-step explanation:

When estimating the value of an income-producing property at the end of a five-year holding period using the income capitalisation approach, you would utilize the property’s expected future cash flows and potential capital gains. This method involves projecting the income the property will generate and then discounting that income back to its present value at an appropriate discount rate. It also involves assessing the potential sale price of the property at the end of the holding period, which may include considerations of capital gains - the increase in value the property has gained over the investment period.