Real Estate Appraisal

A real estate appraisal is a licensed appraiser's opinion of a property's market value, developed through the sales comparison, cost and income approaches. The income approach is where cap rate lives: the appraiser derives a cap rate from comparable sales and applies it to the subject's net operating income.

For commercial property the income approach usually carries the most weight, and the appraisal will state the cap rate used and how it was derived. For one to four unit rentals, comparable sales typically lead and the income approach supports; the appraisal also produces a rent schedule that lenders use.

An appraiser's NOI is built on market rent, stabilized vacancy and full expenses including management and reserves, whether or not the current owner pays them. That is the discipline behind an honest cap rate. When your own NOI differs from what an appraiser would compute, the appraiser's version is the one a buyer and a lender will see.

Further reading: Real Estate Appraisal on Wikipedia.