Profit (Accounts) Method
The profit method of valuing properties is used when value of the property is dependent on the business carried out within the property and when rental evidence for the property is absent from the market. Such properties are not compared with other investment properties such as residential accommodation where there is no on-going trading and rental rates are well documented. Instead the profit method considers the relationship between a property's potential profits from trade and the tenant's ability to pay rent. Examples are hotels, restaurants, old-age homes, cinemas, race courses and petrol filling stations and public buildings.
The profit method estimates the rent which may be payable based on the profits extracted from annual accounts prepared by the business or by comparing properties generating profits when used for the same business.
To calculate the rental income from a property the profit method takes the gross earnings generated by the business based on the property and then deducts the working expenses incurred by the business. The remaining balance is the amount that can be paid in rent.
rent = gross earnings - working expenses
Gross earnings must be reasonably consistent.
development (residual) method
income (investment) method
contractor's (cost) method