Investment Property Guide

Valuation by Cap Rate

Income properties are bought for a return on investment so income shoule be used to determine the property’s value.

Determining valuation by cap rate begins with the gross income of a property. You then subtract all expenses except loan payments. For example, if a building's gross income is $100,000 per year, and the expenses $40,000, you have a net (before debt-service) of $60,000. Apply the capitalization rate to this figure.

Suppose the acceptable cap rate in the area is .10 (ask a real estate agent for your area’s cap rate). This means that investors expect a return of 10% on the value of the property. Divide the income of $60,000 by .10. $600,000 would be the indicated value of the building.

It sounds easy right? Well, its not exactly. You have to be sure that you are getting the correct income figures. Sellers love to exaggerate income figures and hide some expenses to make a more profitable sale. Leave no stone unturned.

There is no perfect was to appraise a property. Simply use the information found on this and our sponsor site to invest wisely and good luck on your road to success.