Income-producing properties need to have methods to determine the value of a property. The value of the investment can be determined by using some of the following formulas: net operating incomes, capitalization rate, Loan to Value ratio.

Capitalization Rate (Cap Rate) = net operating income (NOI) / market price

Net Operating Income (NOI) = Rental Income - Operating Expenses

The cap rate is used to estimate the purchase price of income producing properties. A market cap rate is determined by evaluating the financial data of similar properties which have recently sold in a specific market. It provides a more reliable estimate of value than a market Gross Rent Multiplier since the cap rate calculation utilizes more of a property’s financial detail. Typical cap rates run from 8% to 12%

Gross Rent Multiplier (GRM) = Sale Price / Monthly Potential Gross Income

Generally speaking, when comparing similar properties in similar location the lower the GRM, the more profitable the property. GRM does not take into consideration operating expenses.

Return on Investment (ROI) = (initial investment - final investment) / initial investment