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How To Determine an Income Property's Value Using Capitalization Rate

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Old apartment building
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As a real estate agent or broker working with investor clients, you'll need to understand income property valuation methods. One used frequently uses property income and the capitalization rate to determine the current value of the property for purchase consideration.
Difficulty: Easy
Time Required: 5 minutes

Here's How:

  1. Determine the net operating income of the subject property the client is considering purchasing. If it's an apartment complex, determine the net rental income after expenses.

    Example: A six unit apartment project yielding $30,000 net profit from rentals.

  2. From recent comparable sold properties, determine the capitalization rate.

  3. Divide the net operating income by the capitalization rate to get the current property value result.

    Example: Assume a capitalization rate of 11%.

    $30,000 / .11 = $272,727 current value of the property.

Tips:

  1. This is not the only method for calculating income property values. It's only one tool in the box. The value returned can be modified by using other tools and calculations. Check out our spreadsheet solution here.
  2. We now have a forum for real estate investors to discuss strategies, share knowledge and have fun talking real estate investment. Join the forum now.

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