Whether apartment building, commercial hall, or mixed-use property: The value of income-generating real estate is determined primarily by the sustainably achievable earnings. For banks, financing partners, and professional investors, the Income Approach (known in Germany as Ertragswertverfahren) is the gold standard for property valuation. Legally, the procedure is defined in the Real Estate Valuation Ordinance (ImmoWertV). For banks, the Mortgage Lending Value Rules (BelWertV) also apply. Learn how to construct the calculations mathematically, how to determine operating expenses, and how our integrated BelWertV generator delivers bank-grade results instantly.
1.The Core Principle of the Income Approach
Unlike the asset value method (which builds on rebuilding costs) or the comparative value method, the income capitalization approach separates the property value into two parts:
- Land Value: The value of the land alone. It is determined using standard ground values (Bodenrichtwerte) in comparison. Land has an infinite useful life.
- Building Capitalized Value: Capitalized building earnings. Because buildings degrade, this income stream is capitalized over their remaining useful life (RND).
To isolate building earnings, land value interest (land value * capitalization rate) is subtracted from the property's net income. The remaining building net income is then capitalized.
2.Step-by-Step Mathematical Flow
Income Valuation Steps
- Gross Revenue: Total potential yearly rent at 100% occupancy.
- - Operating Expenses: Subtract non-recoverable costs (maintenance, management, vacancy risk).
- = Net Operating Income (NOI): Property income before land interest.
- - Land Value Interest: Land value multiplied by the cap rate (
Land Value * Cap Rate). - = Net Building Income: Net income generated specifically by the building.
- * Building Multiplier (V): An annuity factor based on cap rate and remaining useful life.
- = Capitalized Building Value: The present value of the building.
- + Land Value: Re-add the land value.
- = Preliminary Income Value: Sum of land and capitalized building values.
- +/- Adjustments: Add or subtract for outstanding damages or rental ties.
- = Final Income Value: The fair market value of the property.
3.The Multiplier Formula
The building multiplier (V) is calculated using the present value of an annuity formula:
where q = 1 + (p / 100) [p = Cap Rate / Liegenschaftszinssatz in %] and n = remaining useful life in years.
4.Step-by-Step Calculation Example
| Step | Value in EUR | Formula / Context |
|---|---|---|
| 1. Yearly Gross Income | 67,500.00 | 450 m² * 12.50 € * 12 months |
| 2. Operating Expenses | - 14,175.00 | Estimated at 21% of gross revenue |
| 3. Net Operating Income | 53,325.00 | Gross - Expenses |
| 4. Land Value Interest | - 9,800.00 | 280,000.00 € land value * 3.5% cap rate |
| 5. Net Building Income | 43,525.00 | NOI - Land Interest |
| 6. Building Multiplier (V) | 21.36 | Calculated for 40 years RND, 3.5% cap rate |
| 7. Capitalized Building Value | 929,694.00 | Building Net Income * Multiplier |
| 8. Land Value | 280,000.00 | 800 m² * 350 €/m² standard land value |
| 9. Final Value before Damages | 1,209,694.00 | Building Value + Land Value |
| 10. Estimated Value | 1,184,694.00 | Adjusted for roof damages (-25,000 €) |
Conclusion
Valuation is essential to verify pricing before getting involved in a real estate investment. Use PropAI Analyst to automate all calculations according to standard guidelines (ImmoWertV and BelWertV) in minutes. Run your first appraisal via the Dashboard.