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Scan for outdated or missing drivers - takes under a minuteDriver Scan →Clear out junk files and repair common Windows errorsFree Scan →To estimate a property’s value using a capitalization rate, divide its annual net operating income (NOI) by the cap rate expressed as a decimal. For example, $100,000 in annual NOI divided by an 8% cap rate (0.08) indicates a value of $1,250,000. This is a direct-capitalization estimate, not a complete appraisal or a guarantee of market value.
Calculate the indicated value
The direct-capitalization formula is:
Indicated value = annual NOI ÷ capitalization rate
- Determine annual NOI using an income and expense definition appropriate to the property and analysis.
- Convert the cap-rate percentage to a decimal: for example, 8% becomes 0.08.
- Divide annual NOI by the decimal rate.
Example: $100,000 ÷ 0.08 = $1,250,000. The California Board of Equalization presents the same basic relationship as income divided by rate equals value in its Lesson 8 on the income approach.
Use the right income figure
NOI is property-level income after applicable operating expenses, not the owner’s cash flow after financing. The Board of Equalization’s lesson illustrates income after vacancy and collection loss and operating expenses; its overall capitalization example does not include debt service. Accordingly, do not subtract mortgage payments when calculating an overall rate for the whole property. Debt service may matter in an equity cash-flow analysis, which is a different calculation.
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Use a consistent annual period and expense convention for the NOI and the rate you apply. The result changes if the income is based on a different period, vacancy assumption, or operating-cost treatment.
How to choose a supportable cap rate
A cap rate is not a universal percentage to apply to every property. It should be supported by relevant market evidence and paired with an income measure prepared on a consistent basis. The California Board of Equalization describes deriving overall rates from comparable-property sales or using a band-of-investment method. Its guidance emphasizes matching factors such as property use, remaining economic life, the shape of the income stream, and other relevant characteristics; see its overall capitalization rate discussion.
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- Compare properties with similar use and characteristics.
- Align geography and the period and stabilization of income.
- Check that vacancy, collection loss, and operating expenses are treated consistently.
- Consider the appraisal purpose, remaining economic life, and how the rate was derived.
- Use market evidence to support the rate rather than choosing a rate to produce a preferred price.
The Board’s income-approach summary also notes that a market-value indication depends on accurate income and expense forecasts, estimates of remaining economic life, and capitalization rates supported by market data. The reviewed official material does not establish a current representative cap-rate table by property type or geography, so the worked figures here should not be treated as market benchmarks.
See how the rate changes the estimate
With NOI held constant, a lower cap rate produces a higher indicated value. A 2021 example from the Washington, DC Department of Licensing and Consumer Protection shows the arithmetic:
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| Annual NOI | Cap rate | Indicated value |
|---|---|---|
| $200,000 | 10% | $2,000,000 |
| $200,000 | 9% | $2,222,222 |
These are illustrative calculations from the department’s 2021 property-management study guide, not current market-rate observations.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Know what the calculation does—and does not—establish
Direct capitalization reduces an income stream to one value indication. The result depends on the selected income period, forecasts, and rate assumptions, so the formula alone does not establish market value. Treat the estimate as only as reliable as the NOI, the rate evidence, and the comparability of the properties and circumstances used.
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Tax appraisal may use a different setup from investor underwriting. In the California Board of Equalization’s property-tax guidance, property taxes are not deducted as an operating expense from the income to be capitalized; the described method capitalizes net income before recapture and taxes using an overall rate plus an effective tax rate. That convention is specific to the stated property-tax context and jurisdiction, not a universal rule for investment analysis. See the Board’s Lesson 8 guidance for that treatment.
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- FIGURE OUT THE RIGHT LOAN: For your client at the press of a button for jumbo, conventional, FHA/VA, or even 80:10:10 or 80:15:5 combo loans; check to see if ARMs or bi-weekly loans, quarterly payments or if interest-only payments are the answer; giving your client more choices; easily perform what if loan or TVM calculations find loan amount, term, interest or PITI or PI payments
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