This method has already been discussed briefly, and the purpose of this chapter is to look a little deeper into its use in practice, and to consider the role of the Years' Purchase.
As stated earlier, the method involves the conversion of an income flow from property into an appropriate capital sum. The capital value of a property is therefore directly related to its income producing power, which may give rise to actual, notional, or potential income. The income flow will be actual when a property is let on lease and the tenant pays a rent for use and occupation. There is a notional income flow when an owner occupies a property himself or herself, as although he or she will obviously not pay a rent, the notional rent is the figure which he or she would otherwise have to pay to acquire the use of a similar property. The value of the property to him or her as an occupier should also be at least as great as the market rental value, otherwise he or she would be better off letting it on the market. So, even if property is not let, the full rental value can be estimated, and this is also possible when a property is vacant and available to let. The Investment Method of valuation can therefore be used even when no rent actually passes on a property, the income producing potential being estimated by the valuer.