You’ve done your research and you’ve estimated the net operating profit to be £5,000 per year. If we require a capitalisation rate of 5% p.a. from an investment of this type, then we would be prepared to pay £5,000 p.a. ÷ 0.05 = £100,000 for this property. In valuation parlance, this process capitalises the net operating profit of £5,000 p.a. to produce a capital value for the property. The multiple we used is 1 ÷ 0.05 = 20 times.
