The earned value method describes a valuation system for evaluating the profitability of an investment property in a manner that takes all aspects into account. This process determines the so-called investment income – i.e. the sum of “future payment surpluses from an investment property”.
The earned value method describes a valuation system for evaluating the profitability of an investment property in a manner that takes all aspects into account. This process determines the so-called investment income – i.e. the sum of “future payment surpluses from an investment property”. In principle, investment income can be recorded as a key business indicator for any type of investment. In terms of real estate investments, however, it has a threefold significance.
The income from a property not only serves as the basis for calculating property tax, but is also used to check the profitability of rented or leased properties. For example, the earned value method set out in the German “ImmowertV” is used to set the operating costs of rented residential units or commercial buildings in relation to the rent level or to determine the profit that a property encumbered by heritable building rights brings to its owners. For owners who are considering selling a property, the earned value method also proves relevant in that it enables the calculation of the market value.
In order to determine the income from real estate in Germany, the earned value method set out in Sections 17 to 23 inclusive of the Ordinance on the Principles for Determining the Market Value of Real Estate (ImmoWertV for short) is applied . Since the value of building land is stable, but the buildings erected on it have a limited useful life, the land value and the building yield are calculated separately; Only the sum of these factors yields the capitalised income from the entire property.
We assume no guarantee and no liability for the accuracy or completeness of this article, nor that it is up-to-date.
References
Breuer, Claudia: Ertragswert. In: Gabler Wirtschaftslexikon. The version of the article cited here was last revised on 17.10.2019 at 16:03.
The full regulation on the principles for determining the market value of land can be found at “Gesetze im Internet“, an official website of the Federal Ministry of Justice.
The separate calculation of the land value and the building income value required for this as part of the capitalised income approach is also prescribed in the Valuation Act (BewG) Section 184 Bewertung im Ertragswertverfahren .
