Income value of a rental apartment building: which assumption changes the result?

First document a verifiable base model

Note the valuation date, definition of value, approach and all significant starting inputs. These include assumed rents, vacancy periods, owner costs, exceptional investments, useful life and capitalisation. If a land component or proceeds at the end of the analysis are included, their treatment must be visible. Without this information, two tables can answer different questions despite having the same heading.

§ 5 LBG links income value to future or achieved net income, an appropriate rate and the expected useful life. Simply dividing annual rent by a percentage captures these relationships only under highly simplified assumptions. For a professional valuation, the choice of model must be justified and the result placed in its market context.

Foundations: RIS – Bundeskanzleramt [1] · RIS – Bundeskanzleramt [2]

Which variables should be changed individually?

Start with inputs for which documents are missing or to which the decision might be sensitive. An income range must fit the contractual position. Wherever possible, a cost range should be based on an assessment and several comparable quotations. A delay is modelled as a later start of payments, rather than also being deducted as a complete loss of rent over the same months.

The rate requires a professionally justified range. A borrowing rate is not automatically a property's capitalisation rate. Nor should a higher risk be arbitrarily counted several times through lower income, a blanket deduction and a higher rate at the same time. The valuation professional must explain which risks have been included where.

Foundations: RIS – Bundeskanzleramt [1]

Do not confuse a change in the result with uncertainty

Compare each variation with the unchanged base case. Add the absolute and relative difference and identify the change tested. A large movement caused by an unrealistic variation says little. The combination of a plausible range and its resulting effect on value is more informative.

Sensitivity is not a forecast distribution. Three variations are not automatically equally likely, and the lowest calculation is not a guaranteed minimum value. Also label input quality: evidenced, professionally estimated or unresolved. This reveals whether a major driver of the result is already well documented or whether further review would actually be worthwhile.

Why the time horizon needs particular attention

Where income changes over time, show cash flows by year or project phase. Renovation may incur expenditure earlier and generate additional income only later. The further away a payment is, the lower its present calculated value at a positive discount rate. Cost overruns and delays must therefore be placed at the correct times.

Pay particular attention to what happens after the last year shown. An assumed residual value or sale proceeds can dominate the result. Ask to see the income, costs, condition and capitalisation assumption underlying it. Simply extending the spreadsheet horizon does not create additional benefit if the same later income was already included in the terminal value.

Foundations: RIS – Bundeskanzleramt [1]

Which review should be commissioned next?

Build related scenarios only after completing the individual tests. A delayed conversion combines later income with capital tied up for longer and, possibly, additional costs. Describe this combination with clear conditions. Legal questions are not assigned invented probabilities; unchecked permissions or rent assumptions remain explicit conditions of the scenario.

Rank unresolved issues by their effect on the result, the cost of clarification and their relevance to the imminent decision. If a limited investigation can narrow down a major cost risk, it is often more useful than additional decimal places in the rate. The goal is a specific decision on further review: which document or investigation is needed and which assumption it can then replace.