You can begin with the free cash flow for debt service that is generated from the tenant income of the property. The free cash flow is cash generated after subtracting operating expenses such as property taxes, insurance, repairs, and an amount for refurbishing at some point(such as changing the roof, HVAC units etc ) that are the responsibility of the landlord. Take the cash flow amount and divide it by the percentage of return that you want on your investment. For example, if you want a 10% return on your investment, you can pay $ 360,000 for the property if it has net income of $ 36,000 annually. The next step is to use the current vqlue of the property for its current use and also figure out what the property may be worth into the future. For example, if you have knowledge that a casino may want the property for a parking lot next door to their expansion, the property will have a new value and its current income and use play no part in its value. If it is to remain in its current income use, then the value is going to be tied to the cash flow unless the property is in deterioting condition.
Dec 7, 2009