Divide the NOI by the property value to determine the cap rate:
Net Operating Income / Value = Cap Rate
Divide the NOI by the cap rate to determine the property value:
Net Operating Income / Cap Rate = Value
Multiply the property value by the cap rate to estimate the NOI:
Value X Cap Rate = Net Operating Income
For example, let’s say you were trying to determine the market value for a property so you can list the property. You already know the NOI, so after conducting a survey of the prevailing cap rates, you present your findings to your client during a listing presentation:
As you can see, higher cap rates can result in lower market values. That’s why it’s important to know the prevailing cap rates for a market area and property type: it will help you determine a realistic price for a property.