Recapture Premium
In the case of property investments the recapture rate (premium) can be calculated as follows: 1. Estimate the useful life of the property (let’s say 40 years) 2. Divide 1 over the useful life to find the rate to be used as recapture premium for the calculation of the required return or capitalization rate by the investor. Thus with a useful life of 40 years the recapture premium is equal to 1/40=2.5% per annum This calculation methodology though assumes that the capital recaptured by the investor is not re-invested. If it is reinvested though, then the sinking fund method of calculation needs to be used in order to calculate the recapture rate. In the example above, a lower annual recapture rate will be required for the investor to recoup the invested capital in 40 years if the recaptured capital is re-invested. Tweet
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