Yield Capitalization

1
Yield Capitalization

• Dr. Jim Burton
• Marketing Real Estate
• Richards College of Business

2
Overview

• Steps
• Discounting Concepts
• Discounting Process
• Income Patterns
• Reversion

3
Steps

• Select holding period
• Forecasts future cash flows
• Chooses yield rate (discount rate, IRR)
• PV of future cash flows

4
Discounting Concepts

• Income patterns
• Capital return method
• PV/FV mathematics
• Investors practices expectations
• Market yield rate

5
Discounting Process

• Initial cost or investment
• Periodic cash flows
• Reversion or sale proceeds
• Yield or discount rate (IRR)

6
Income Patterns

• Level annuity
• Paid in advance
• Variable annuity
• Increasing or decreasing
• Step-up or step-down
• Straight line change
• Exponential curve (constant-ratio) change

7
Reversion or Sales Proceeds

• Terminal cap rate
• Sales proceeds Price less selling costs
• Net sales proceedsPrice less selling costs less
  mortgage less taxes