The last method of appraising real estate value is called the “capitalization of income” approach. This method determines a building’s value based on its profitability. In the real world of ap praising, different methods of valuing property are used for different types of buildings. With single-family homes, the comparative method is used most often. The reproduction cost method is usually employed for specialized properties (like a church) and for new construction. But for investment property of multiple units, the capitalization of income method is best.

This is probably the most difficult of the three methods to use properly when valuing income property, but actually it is the preferred method. Here’s how it works:

For starters, it might help to think of capitalization rates as interest rates. When you put money in the bank you ask, “Whatinterest rate will I get?” Capitalization rates are the same thing. Let’s assume you have $10,000 in a savings account, and at the end of the year you earned $500 in interest. The following formula will show your interest rate:

Interest earned – Amount invested = Interest rate

Or plugging the savings account numbers into the equation, we get:

$500 / $10,000 = 5%