The value an investor can put on an income-generating property can be determined by the income approach. This is based on the present value of the rights to future income that is being purchased. In this approach income divided by rate equals value.
To do this: – Estimate the annual potential gross income from all sources. – Deduct for vacancies and collection losses (“bad debt“) to obtain the effective gross income. – Deduct the annual operating expenses to obtain the net operating income
Please do not include (1) Debt service (principal and interest payments) (2) Depreciation (3) Capital expenditures/capital improvements (4) The owner’s personal income tax liability
Divide the NOI by the CAP Rate to obtain an estimated value.