There are three common ways to value a property and they all have their appropriate applications. For instance a user, or an investor or a lender would each have different considerations.
1. The Comparison Method:
It involves looking at properties recently sold and similarly situated and configured as the prospective acquisition.
2. The Replacement Cost Method:
It requires compiling the costs related to rebuilding the property with essentially the same materials and include the cost of the land.
3. The Capitalization Method or cap rate method:
The cap rate is the ratio between the net operating income produced by the property and its acquisition cost. This calculation computes the actual return earned on the investment to determine the value of the property. The formula is simply expressed: Net operating Income / acquisition cost = cap rate. A high cap rate is good for the buyer and a low one better for the seller.
Attached is a sample spreadsheet to help you calculate a cap rate. Try it by filling in your own numbers.