Income Approach Calculator

Enter monthly rent and cap rate to see the income approach result.

What the income approach is

The income approach estimates value by converting future income expectations into a present value. It is most applicable to properties purchased primarily as investments -- single-family rentals, small multifamily, and commercial properties.

Direct capitalization

Direct capitalization divides net operating income by a capitalization rate to arrive at an indicated value. The formula: Value = NOI / Cap Rate. It is simple and fast, requiring only one year of stabilized income rather than multi-year projections.

How cap rate is derived

Cap rate is extracted from the market by analyzing recent sales of comparable investment properties. For each sale: Cap Rate = NOI / Sale Price. Appraisers survey several comparable sales to identify the prevailing cap rate for the property type and neighborhood.

When appraisers use it

The income approach is required for properties typically purchased for their income-producing potential. For owner-occupied single-family homes, it is developed as a secondary check. For multifamily and commercial, it often carries the most weight in the final value reconciliation.

What is the income approach?

The income approach is one of the three recognized appraisal methodologies. It values a property based on its ability to generate rental income. The direct capitalization method divides net operating income by the prevailing cap rate to indicate value.

How do I find the cap rate?

Cap rate comes from the market, not from a formula. To find it, gather recent comparable sales of similar rental properties, estimate their NOI at the time of sale, then divide NOI by the sale price. The resulting percentages from several sales provide the market cap rate range for your property type and area. Cap rates vary widely by location, property type, and market conditions.

What expenses are included in NOI?

Net operating income deducts operating expenses from effective gross income. Operating expenses include property taxes, insurance, maintenance and repairs, property management fees, utilities (if landlord-paid), and replacement reserves. Mortgage payments and depreciation are not included -- NOI is a pre-financing, pre-tax metric.