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Replacement Cost Rent

Blog by Andrew Reid | February 11th, 2021

Replacement Cost Rent (RCR) is a tool that calculates replacement cost rent based on development cost inputs and capitalization rate inputs. A prospective developer could use this to evaluate the feasibility of a development site. The developer could also use this to calculate the highest and best use of a property. The developer would compare the replacement cost rent output with the actual rents prevalent in the market to determine whether the market would support additional development.
Alternatively, potential buyers of existing properties could use this tool to evaluate the threat of additional stock being added to the market. If this tool determines that replacement cost rents exceed current rents, the investor could reasonably conclude that rents would need to grow before the additional stock is added that could compete with their potential acquisition. (David Silvermintz, 2019)