How this number is made
If you know the income and the cap rate buyers in that market are paying, the price those buyers would offer is the income divided by the cap rate. It is an income approach, not a comparable-sales appraisal.
- NOI is after operating costs and vacancy, before debt.
- The cap rate should come from recent sales of similar buildings, not from a national average.
Formula
Value = net operating income ÷ cap rate.
Worked example
With the figures already in the form, value at that cap rate is $461,538.
Questions
What if the cap rate is wrong?
The value moves one for one. A 6% cap and a 7% cap are different prices. Use a range of caps if you are unsure.
Does condition matter?
Only through the NOI and the cap you chose. A tired building should not get the cap rate of a new one.