formula for determning value of a property based on the cap rate

In Buying Property - Asked by Geary B. - Oct 3, 2011
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Answer(s)

Rob M.
Lender/Mortgage Broker
Houston, TX

IRV, Income divided by rate equals value.

Oct 4, 2011
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Chris F.
Broker/Agent
Salem, OR

First you need to define income.
Income will be all revenue that a property brings in MINUS all operating expenses and costs of ownership. Do not subtract debt service or depreciation from income. Depending on the building type, a credit for vacancy may be appropriate also.
Take the annual income and divide it by the cap rate to give a projected value.

Oct 4, 2011
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Robert Lamar S.
Appraiser
New York, NY

The question is misspelled.
value = income divided by rate (IRV)
rate = income divided by value
income = rate x value

Oct 4, 2011
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David S.
Owner/Investor
Klamath Falls, OR

Cap rate is useful to submit your bids to buy properties. The higher the cap rate the higher return you are getting from the investment. You want a higher cap rate...I use a rate of 8% and above for a good investment.
NOI= Net operating Income of the property (use only the "actual" income produced and expenses not the info the brokers give.)
Cap Rate is = to the NOI divided by the offer price. The offer to give is just the flip of the equation, NOI divided by what Cap rate you want. Ex. Investment produces $1.8M per year, after expenses there is a net profit of 235K/yr. What is the Cap rate?...
NOI/1.8M *100%=13.05% Cap Rate, this means it will pay for itself in 7.7yrs (100/13=7.69)
The actual value of the investment is determined by comparables in the neighborhood..if none then you can give a low and high offer just based on the Cap Rate.
It is a decent price to offer 8% Cap Rate...so offer is NOI/Cap Rate= 235K/8%=2.937M Value
A lower Cap Rate(6.5%) produces a higher asking Value...235k/6.5%=3..615M
A higher Cap Rate(10.0%) produces a lower asking value....235K/10%=2.35M..this pays for itself in 10 yrs!
So you need to determine what Cap Rate you want ...then get a high and low offer by using an Increase of 1% and a Decrease of 1% for your High and Low offers. Hope that helps!

Oct 7, 2011
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Lori M.
Providence, RI

I agree with David S, but here are a few simple formulas that work well too:
Sales price multiplied by Cap Rate = Rent/NOI
Rent divide dby Cap Rate = Sales price
Rent divided by Sales Price = Cap Rate

Oct 13, 2011
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