Land Residual Technique [3141]

The NOI is $20,000.  Return on equity is 10%.  The building value is $100,000.  The building  life is 25 years.  What is the total value of the property using the land residual technique.

The NOI is $20,000.  Return on equity is 10%.  The building value is $100,000.  The building  life is 25 years.  What is the total value of the property using the land residual technique.

The recapture rate is 4%.  Since the building has a life of 25 years, you must recapture 4% per year to get it back (100%) in 25 years.  Since the expected return on equity is 10%, the building cap rate must be 10% + 4%.  An investor always expects his return (10%) but he also expects to get his investment back.  It will take 4% each year to recoup the investment.