1. Cap Rate Method

• Cap rate = Net operating income (NOI) / purchase price.
• NOI = Net income + interest expenses + depreciation.
• High Cap rates are associated with higher risk and low demand while low cap rates are associated with stability and low risk.

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2. Sales Comparison Method

• Compares subject property to similar properties within the same market area.
• May correct for unique features in the subject property.

3. Capital Asset Pricing Model

• Determines an asset’s rate of return – taking into account systematic risk – and compares this rate to the rate of return on low/no risk investment options.
• Goal is to produce a portfolio with the best possible expected rate of return for the level of risk (see graph below).
• Slope of the capital allocation line (CAL) = incremental reward to risk ratio.

4. Cost Method

• Free-market value of land + construction cost of property – depreciation.
• Cost/value derived while taking into account “highest and best” use of the property and land including zoning factors and other limitations.
• Often used to value special use properties.

Last Updated on April 1, 2012 by Ramin Seddiq