The Functional Relationships and Use of Going-In and Going-Out Capitalization Rates

Ko Wang (), Terry V. Grissom and Su Han Chan ()
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Terry V. Grissom: Real Estate Center Texas A&M University College Station, Texas 77843-2115, http://RECenter.tamu.edu/
Su Han Chan: Department of Finance California State University, Fullerton Fullerton, California 92834, http://business.fullerton.edu/finance/

Journal of Real Estate Research, 1990, vol. 5, issue 2, 231-246

Abstract: In performing a Discounted Cash Flow Analysis for an income-producing property, a traditional rule-of-thumb indicates that the going-out capitalization rate should be one-half to one percent higher than the going-in capitalization rate. So far, there has been no theoretical model or empirical evidence to support or to dispute this assertion. This paper develops a model to examine the determinants of the going-out capitalization rate, as well as the relationship between going-in and going-out capitalization rates in a complete market setting. The proposed model indicates that the rule-of-thumb can be challenged, and the selection of an appropriate going-out capitalization rate requires a careful examination of the changes in the assumed income-growth rates, changes in the assumed required rates of return, and changes in the assumed property-appreciation rates during and after the projected holding period. The functional relationship between the property-appreciation rate assumption required for Ellwood methods and the going-out capitalization rate assumption required for DCF analysis also is derived.

JEL-codes: L85 (search for similar items in EconPapers)
Date: 1990
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Citations: View citations in EconPapers (3)

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