I do not know the term “capital extraction”. Here in the US we use the capitalization rate (first future year cash flow) – or – the discount rate (multi-year rate normally looking at a 10 year cash flow with sale of property at the end of 10 years)
When does it make sense to use the capital extraction method to value commercial real estate as opposed to using the capitalization rate?
We are looking at purchasing a multi-family development in Dallas and are trying to determine how much we are willing to pay to acquire the property. Should we be relying more on the capitalization rate or the capital extraction method to determine the property’s value?
Note: This response is not legal advice and no attorney-client relationship exists. The capital extraction method assumes that there is both net operating income and sale price information available on comparable income-generating properties. If this condition exits, it will generate a useful capitalization rate to be applied to the NOI of her target property.
The capitalization rate method only takes a look at value at a specific point in time. A better measure is a discounted cash flow method, which takes into account the future cash flows, discounted, but it has the risk in making assumptions about an anticipated growth rate.