And after all it’s the income approach ultimately especially when you consider it a little bit broader than simply in dollar terms that is responsible for the desirability of owning property in the first place another point which is made in the study guide is that land like money is not capital even though in our part of property valution history.
We often refer to both money and land as capital and Property valuers go into the history of that confusion in the study guide one of the odd things about the fact that these two very important and valuable things in our society are not capital strictly speaking is the curiosity of where yield rates come from.
And for that matter interest rates and their relationship yield is the ratio between the income as rent divided by the property valuation so yield as a simple percentage and it’s this ratio of the rent divided by the capital value and in some ways.
It’s similar to the interest rate on money in that the interest payment you receive divided by the principal of a deposit or a loan gives you the rate of interest both of these rates ultimately are mysterious.
Property valuers don’t exactly know where they come from they don’t have some logical or scientific basis we can observe them as being present but they’re present more as a social artifact in other words something which is simply a product of the doings of society not as something that comes up as a result of some quantum of labor or quantum of something.
Which is quantifiable and this gives rise to what is a ongoing question both in economics and in property valuation and that is what is the appropriate rate of profit rate of interest and in property yield to apply when you’re going from a rental value to a capital value and in the study guide.
Property valuers look further at the similarities and linkages between money and land this is very important because money and land are linked in our world and especially
Since if interest rates fall just give a little bit of thought to what that does to the price of property there’s land and money are very very important assets in our economy let’s move further now.
And look property as an investment if Property valuers are looking at getting into the mind of the most likely purchaser which after all is where the valuer must delve to find the answer to the property valuation problem.
What we find is that property investment competes with other financial investments in other words as investor I might have half a million dollars to invest
And I’ll be wondering whether to buy government bonds or shares in a company or maybe an item of property and so the item of property must be able to be compared in some way.
And evaluated against these competing investments and this is where yield is so useful because yield gives you a rate of return which can be related to the rates of return on money loans and also on profits on business ventures.
And so yield already is an attractive comparator of investment value and so by using yield Property valuers find that we’re able to more readily understand property as an investment object now if we know the yield that’s operating in a particular property valution market.
And we know the rent we get the capital value simply by dividing the rent the return the net operating income by the yield and that’s exactly what the income approach is very very simply in this second last bullet point here capital value or the sale price of land equals.
The return as in the rent divided by the yield this means that Property valuers started to go to the market to find the rental property valution we tend to do that by looking at comparable investment properties.
And what their rental value is likely to be what we’d be able to rent them for at least and for we also go to the property valution market to find the yield nice thing about going to the market for these two factors even though it appears to be a sales comparison approach Property valuers don’t have to go to exactly the same kinds of property to look at the yields in fact.