Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

8 Numbers To Know For Your Property Value Estimator

Written by Paul Esajian

Any investor knows that performing property value estimations is a crucial aspect of making smart investment decisions. Using a good property value estimator, whether your system or an online tool, can help minimize confusion and errors that occur too often when making complex financial calculations. Below you will find a discussion of several approaches to property valuation estimations, including step-by-step guides on making those calculations. Read on to identify the best property value estimator for your investing niche.

8 Numbers For Accurate Property Valuation Calculations

Any property value calculation will require a working knowledge of key numbers, such as the down payment, mortgage payment, and interest rate, to name a few. Before sitting down to calculate property value, make sure you have taken the preliminary step in gathering the figures that are commonly required in these analyses:

  1. Mortgage Payment: A mortgage payment is the monthly payment made to the lender against the property loan. A portion of the payment will help pay off the original loan principal, whereas the other portion is interest paid to the lender. The mortgage payment may or may not include property taxes and insurance.

  2. Down Payment: A down payment is an initial cash payment that represents a percentage of the property’s total purchase price. Although homebuyers who take out a Federal Housing Administration (FHA) loan or plan to occupy the property can put down as low as 3.5 percent, most investors should expect to make a down payment around 20 to 25 percent of the purchase price.

  3. Rental Income: Investors often utilize a projection of rental income in order to qualify for a mortgage loan. A rental income that covers more than just the monthly mortgage payment will be viewed as less risky by the lender and can result in better loan terms.

  4. Price to Income Ratio: The price to income ratio is a popular housing affordability measure. The ratio compares the median household price and median household income in a given area. Housing becomes more affordable as the ratio decreases.

  5. Price to Rent Ratio: To find the price to rent ratio, divide the median home price by the median annual rent in a given area. The ratio measures the relative affordability of renting versus buying in a given housing market. Investors should avoid investing in markets with high ratios, such as 20 or above, as it signals a more favorable market for renters.

  6. Cash Flow: Cash flow, often measured on a monthly or annual basis, measures the net income generated by a property after netting out any expenses and mortgage payments from rental income. Cash flow is positive if there is a remaining balance after all expenses and payments for that specific property are made. Conversely, negative cash flow results from the rental income not being enough to cover the owner’s expenses for that specific property. Investors should always avoid properties with a projected negative cash flow.

  7. Gross Rental Yield: The gross rental yield provides investors with the annual income generated by a property, measured against the total purchase price. To find the gross rental yield, find the total rental income for one year, also known as the rent roll, divided by the property’s total purchase cost, including closing costs, fees, and renovation costs. Shown as a percentage, a higher rental yield signifies a better investment.

  8. Capitalization Rate: The capitalization rate, or cap rate, can show the potential rate of return on a given real estate investment. It typically takes the gross rental yield a step further by considering the property’s operating expenses. A simple formula for finding cap rate is to divide the net operating income (NOI) by the property’s sale price.

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rental property value calculator

Methods For Determining Capitalization Rate

The capitalization rate is a key metric when it comes to comparing potential investments. This is because the cap rate considers the costs incurred when owning a rental property and can provide a complete picture of the potential income a property could generate. While there are no clear standards for a “good” or “bad” capitalization rate, this number can be beneficial within the context of a particular investment. Luckily, there are several ways to determine the capitalization rate depending on the information you have available.

The Band-Of-Investment Method

According to Investopedia, the band-of-investment method is best used for financed real estate investments, as it relies on properties’ interest rates. The formula for this method requires two main variables: the financing component and the equity component. The financing component refers to the lender’s amount of capital and can be determined by multiplying the mortgage rate by the loan to value ratio. The equity component refers to capital coming from the investor and is determined by multiplying the yield rate by the percentage of cash equity.

Market Extraction

Market extraction is perhaps the most user-friendly method for evaluating the cap rate of a given property. Investors who can calculate the net operating income should have no problem working with the market extraction method. Start by adding the total expenses for a property, including repair costs, taxes, insurance, fees, and vacancy costs. Next, take the annual rental income and subtract the total expenses (calculated above). Divide the resulting number by the total property cost. The final percentage is your capitalization rate.

The Build-Up Method

The build-up method is arguable the second most common way of determining the capitalization rate. Investors will need to start with the interest rate and then determine the liquidity, recapture, and risk premiums. This will be the most difficult part of the formula, though it can be done. Once you have identified these variables, add up the percentages for the cap rate. To learn more about calculating the mentioned premiums, check out this guide by Investopedia.

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How To Evaluate An Investment Property

The following steps demonstrate how to evaluate an investment property using several of the eight commonly-used numbers identified above. There is no one correct approach to evaluating an investment deal; rather, seasoned investors should make several method calculations to analyze an investment deal from multiple angles. To get started, follow the steps below:

  1. Identify the property’s fair market value: Generally, a property will sell at its fair market value (FMV) in an open market. In other words, it is the negotiated price between what a fully informed buyer is willing to offer and what a seller is willing to accept. To find this value, compare other properties in the area that were recently sold that are comparable in size, age, and condition.

  2. Calculate the replacement cost: How much would it cost to build an exact replica of the property at hand? The process of calculating a value using answering this question is called the replacement cost method. This includes the purchase price of land, the cost of labor and materials, but not including any depreciation. This method is useful when it is difficult to identify comparable properties.

  3. Project the potential rental income: If the property at hand is currently an income property, contact the current owners and ask how much they charge for rent. This would also be a good opportunity to ask for a list of monthly expenses and why they are selling the property. If there are no current owners, or they are not willing to provide data, reach out to local rental management companies and inquire about comparable data in the area.

  4. Estimate the annual net operating income (NOI): The net operating income is calculated by taking the total amount of income produced by a property and deducting all operating expenses, such as insurances and property taxes, maintenance, repairs, and management fees. Because expenses can fluctuate from month to month, investors should be aware that the annual NOI is estimated.

  5. Calculate the Capitalization Rate: The capitalization rate, or cap rate for short, can be calculated by taking the property’s total purchase price or market price and dividing it by the net operating income (NOI) estimated above. Some investors will argue that the cap rate is the most important measure for comparing property values. It forces investors to project all possible expenses in detail, allowing them to find the best value.

  6. Calculate the cash on cash return if a mortgage payment is applicable: If a mortgage payment is required, it will first need to be factored in as an expense in the net operating income calculation above. After this is done, divide the annual NOI by the down payment’s total cost and any repairs made before the property can be rented out. This will result in a percentage that represents how much the property will earn relative to the amount of money that was invested.

Calculating Property Value Based On Rental Income

From a real estate perspective, a rental property’s value can be compared with similar properties recently sold in the neighborhood. However, this valuation does not take into account the income component. To estimate property values based on rental income, investors can use the gross rental multiplier (GRM), which measures the property’s value relative to its rental income. To calculate, divide the property price by the annual rental income. The GRM can then be utilized as a benchmark when evaluating comparable income properties.

Variables When Calculating Property Value

There are numerous calculations used when analyzing property value, each with unique variables involved. Finding this information can take a lot of time, and may be a challenge to find in general. A variable that is not accounted for when looking at your valuation models are large shifts in the real estate market. These shifts must be interpreted and forecasted on their own, thus adding another step to your real estate valuations. Many of these numbers can be hard to obtain or even estimate, especially at first glance. The process of calculating property value is complex; but that does not mean investors should just give up.

Instead, be aware of the variability that can occur when analyzing a property. In time, these numbers will be easier to estimate and predict. Along the way, you will learn valuable skills on analyzing deals. When done correctly, this process will have a significant payoff as you decide which properties to add to your portfolio and which to pass on.

how to calculate property value based on rental income

What Is Multifamily Real Estate?

Multifamily real estate is commonly thought of as apartment complexes, which can host more than one space to be rented out. There is a multitude of strategies when it comes to real estate investing. Still, when narrowed down to the category of residential real estate, there are two main types of properties: single-family and multifamily. As one might assume, single-family properties are designed to fit the dwelling needs of up to one family. As mentioned above, multifamily real estate comes into play when a property provides more than one rentable unit. Investors may choose to pursue the multifamily real estate investing niche due to the unique advantages it has to offer.

Multifamily Property Value Estimator: A Step-By-Step Guide

The income method approach is widely agreed upon as the best way to analyze the value of a multifamily property. This method utilizes the net operating income (NOI) and the capitalization rate of the property.

  1. Estimate the property’s net operating income (NOI): A property’s NOI is estimated by deducting all operating expenses from the total income produced by the property in one year. The investment property evaluation section above provides a detailed explanation of how to arrive at the NOI.

  2. Calculate the capitalization rate using the NOI: Now take the property’s purchase or market price and divide it by the NOI calculated in the step above. Multiply the resulting number by 100 to find the capitalization rate. The concept of the capitalization rate was visited in detail in previous sections.

  3. Arrive at the multifamily property value: Once the property NOI and cap rate are calculated, the property value can be determined relatively easily. Divide the NOI by the cap rate to arrive at the multifamily property value. Based on these calculations, investors should realize the importance of accurately estimating the property’s total operating expenses, which affect the resulting NOI, cap rate, and property value calculations.

How To Price A Multi-Unit Property

Figuring out the current market value of a multi-unit property can be tricky, so most investors choose to borrow from the income method approach discussed above. To estimate property values in the current market, divide the net operating income by the capitalization rate. For example, if the net operating income were $100,000 with a five percent cap rate, the property value would be roughly $2 million. However, note that a property’s net operating income and capitalization rate can fluctuate from month to month, so this figure is only an estimate. Investors can also perform a local market comparison of similar multi-family properties in the area or calculate the price via the replacement method discussed earlier.

Investment Property Value Calculator

It should be apparent by now that there are several approaches to calculating property value, with each method requiring a working knowledge of key measures and calculations. Even the most seasoned property value estimator may feel challenged when making complex calculations while keeping track of measures that fluctuate over time. Luckily, investors can utilize an investment property value calculator found online. It is best practice to understand how to calculate property value based on rental income or using cap rate to calculate property value. Still, there is no reason not to make use of helpful tools that are made available.

The Importance of Home Value

Home value is important as you consider purchasing any property, whether it’s a primary residence or investment property. The reason is that the value of a home essentially tells you how much it is worth. This number will influence all aspects of a real estate transaction, from raising financing to negotiating the final purchase price. In essence, the home value will help you determine the properties you can afford and the ones that are priced appropriately.

The importance of home value also extends beyond the initial purchase of a property, as it can help you anticipate other expenses. For example, home value can help determine tax rates, insurance premiums, and even future refinances. Home value is also necessary for several property estimations. These numbers can give you a complete picture as you look at homeownership.

How To Increase Property Value

There are many factors that go into the value of your home. Location is a large factor in the value of your home, as well as the development of the area that your home is located in. As the area around your home develops and gets more shops, restaurants, parks, schools, etc., the value of your home goes up. While it’s hard to control the external factors that go into the value of your home, you do have control over your own property and what you do to improve it.

Landscaping can provide a huge boost to your home value, as well as home improvement projects in and around your house. Every type of project has a different ROI, so before spending a fortune on upgrades you may want to do some research. Maintaining and keeping your house clean, working, and up-to-date will also help your home hold or increase in value. Finally, listing your home for sale at the peak of a seller’s market will inherently increase your property value by letting you sell it at the highest possible price.

Refinancing After Increase In Home Value

Refinancing after your home value increases is a choice that many homeowners will be faced with. Some homeowners will refinance their homes to receive a lower interest rate, lower the payment term, or a new type of mortgage. Other homeowners will opt to cash out their equity in their home and using it to finance other projects or home improvements. At the end of the day, it’s completely up to you to decide what is best for your current situation.

Hiring A Professional Appraiser

Hiring a professional appraiser is a great way to get a lot of information fast. You can have a property appraised both for its current value and for its value on specific dates in the past. On top of a valuation for the actual property, an appraiser will also evaluate the market around the property; which includes the region, city, and neighborhood of the property. Finally, a professional appraiser will give you information on comparable properties in the area. This information will include sales, current listings, prices, historical depreciation, and more. Getting an appraisal done by a professional is an efficient way to help you fast-track your real estate valuations.


Whether choosing to utilize a property value estimator tool or make every calculation by hand, investors are sure to develop an appreciation for property evaluation. Property valuation estimators are critical resources that allow investors to identify the difference between good and bad investment deals. The property’s purchase price only scratches the surface in terms of the value a property has to offer, especially in the long run. Familiarize yourself with the above methods for determining capitalization rate, gross rental multiplier, and more; by practicing these calculations now, you will be better prepared to evaluate (and compare) investment opportunities when it counts.

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