Income value.

The basic idea

Buyers of rental property often price it by its income. They take the property’s yearly net operating income (NOI: rent minus the costs of running it) and divide it by a cap rate, the yearly return buyers in that area expect.

Income value = NOI ÷ market cap rate

Example: $46,300 of NOI at a 6.6% cap rate is worth about $701,000.

A single house is valued differently: see neighborhood appraisal range.

One catch, and how PriceDNA handles it

Property tax and insurance are part of the running costs, but they depend on what the property is worth. So you can’t know the NOI until you know the value, and you can’t know the value until you know the NOI.

Tax assessors solve this by adding the tax rate to the cap rate instead of subtracting taxes from the income. They call it a loaded cap rate (see Cook County and Kentucky). PriceDNA does the same, and adds the insurance rate too, because it treats insurance as a share of value as well:

Income value = income before tax and insurance
  ÷ (cap rate + tax rate + insurance rate)

Both formulas give the same answer. The second just doesn’t need a price to start from. So the income value never borrows the asking price or the PriceDNA Estimate, and it works even when no asking price is entered.

The market cap rate

It starts at the county’s multifamily market cap rate. You can change it in your analysis if you know a better figure. A higher cap rate means a lower income value.

Income value and the PriceDNA Estimate

Both start from the same rent and costs. The income value asks what that income is worth to the market. The PriceDNA Estimate asks what you can pay and still reach your goal, with your financing. When they’re within negotiating distance of each other and the asking price, that’s a good sign.

The income value isn’t an appraisal. If the deal looks strong, get an appraisal before you commit.