Real Estate Appraisal

In a real estate appraisal, a licensed appraiser gives an opinion of a property's market value, weighing the income, cost and sales comparison 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. On small rentals of one to four units, comparable sales normally drive the value while the income approach acts as a check, and the report includes a rent schedule that lenders rely on.

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.