david hornby

A life interest in real estate is the right to occupy a property or part of a property for the duration of life tenant's life. Therefore, there are 2 interests in a property subject to a life tenancy:

1. the interest of the life tenant

2. the reversionary interest known as the remainderman's interest.


Similar principles apply to the valuation of a life tenant's interest as apply to the valuation of a lessee's interest under a normal lease. However, the life tenant's term is unknown whereas for a lease it is known.
The valuer must firstly determine whether or not the life tenant is enjoying a profit rental. If he/she has no profit rental and little chance of a profit rental in the future, the life tenant has no economic interest in the property. However, it is common under a family arrangement for the life tenant to be allowed to occupy the property rent free or at a nominal rent for the remainder of his life. In these circumstances the profit rental is the rental value of the property.


Life tables are published by the Australian Bureau of Statistics and provide the valuer with the expected number of years, on average, a life tenant with indifferent health is expected to live. “Indifferent" health is typical health for a person of that age group. The life expectancy of females is longer than males of the same age.

The value of the life interest is the price that a willing buyer willing seller would agree upon to buy the interest. The life tenant may be able to mortgage the interest but if the tenant is very old or has poor health it is doubtful that a buyer or mortgagee would accept such a high risk investment. In this situation, the life tenant has no economic interest in the property. The life interest must be a marketable commodity to have value.
If the life tenant is reasonably young and healthy it can be assumed that he/she will live the expected life period shown on the life tables. The present value is found by capitalizing the profit rental at a higher capitalization rate than that applicable for a leasehold investment because of the extra risk.


A life tenant is male, 20 years of age and in good health. He occupies a house on a farm rent free and which has a net rental value of $10 000 per annum. The life tables show that he has an expected life of about 55 years.
If he were a lessee paying no rent for a 55 year period the valuation would be made using a capitalization rate of 10% per annum:

PV.PMT(10000) = 9.952 * 10000 = 99520 say $99 500

However, for a life tenant's interest the value is substantially less because of the possibility of the tenant dying before the end of the 55 year period. Therefore, the capitalization rate is increased to take into account the extra risk.
How is the high risk capitalization rate found? - by analysing the sales of life tenant interests.

After the analysis of comparable sales it is found that the appropriate capitalization rate should be 18% per annum. Therefore, the life tenant's interest is:
PV.PMT(10000) = 5.555 * 10000 = 55550 say $55 500 Therefore, the value of the life tenant's interest is much less than for an otherwise equivalent lease. The market will only buy the life interest after a discount of 44 000 compared to an equivalent leased investment property providing for the extra risk.

See: remainderman's interest
life tables