The right formula to calculate value. And Why it matters.
I often read or hear people explain the wrong formula when discussing what's needed to calculate rent roll values. It is important to understand what is the correct formula and why it matters.
People generally understand that the rent roll value is calculated as a multiple per dollar income of the Annual Management Income.
What often gets lost or glossed over is how we calculated that Annual Management Income per property.
- The formula—(Weekly Rent ÷ 7) × 365—is used in rent roll valuations to calculate the exact annual rent of a managed property. This calculated by the management commission (excluding GST) will provide you with the Annual Management Income per managed property.
- This method is considered more accurate than multiplying weekly rent by 52, because it accounts for the fact that a calendar year actually has 365 days (52.143 weeks), not exactly 52 weeks.
- Why This Formula is Used
- Accuracy: It avoids underestimating annual income. Simply multiplying by 52 assumes a 364-day year, missing 1.25 days of rent, which adds up across a large portfolio.
- Daily Calculation Base: Property management software typically calculates rent on a daily basis. Dividing by 7 establishes the exact daily rate, which is then multiplied by 365 for the total year.(often used for other reasons such as arears management and prorate rent calculations).
- Leap Years: It can be adjusted for leap years (using 366 instead of 365) to ensure precision.