In the Income Approach to value, how would an appraiser calculate property value if Net Operating Income and capitalization rate are known?

In the Income Approach to property valuation, the prevailing method to determine the property value when both the Net Operating Income (NOI) and the capitalization rate (cap rate) are known involves division. Specifically, the appraiser divides the Net Operating Income by the capitalization rate.

This approach hinges on the principle that the value of an income-producing property is derived from its ability to generate income. The capitalization rate represents the expected rate of return for investors in that market and is used to convert income into value. By taking the NOI, which reflects the net earnings of the property after operating expenses, and dividing it by the cap rate, the appraiser arrives at a value estimate that indicates what an investor would be willing to pay to receive that level of income.

Understanding this calculation is vital for correctly applying the Income Approach, as it reflects the relationship between income generation and investment viability in real estate appraisal.