Property Value = Net Operating Income / Capitalization Rate

The “income approach” is the primary method used by real estate appraisers to value investment properties.  Although they consider cost and market comparables as well, appraisers typically give the most weight to the income approach when valuing commercial property.

If the appraiser believes that market rents differ from the actual rents of the property, then he or she may substitute them.  Similarly, if a property requires a great deal of maintenance that has been deferred or if capital improvements will be necessary in the future, then the NOI or the value may be adjusted downward by the appraiser to reflect the situation.