Calculating Value, Income, and Rate of Return

Calculating the value, income, and rate of return on real estate investments need not be complicated. Here are three monetary aspects of an investment that share a mathematical relationship. They can help you determine a tangible return on investments like commercial retail, office, industrial and multifamily real estate.:

• Value: The cost or market value of a property.
• Income: The estimated annual income the property can produce.
• Rate of Return: An annual percentage return on the investment.

To calculate the value of an income property, simply divide the annual income by the rate of return, or:

VALUE = INCOME/RATE OF RETURN

To calculate the income of an income property, simply multiply the rate of return by the market value, or:

INCOME = RATE x VALUE

To calculate the rate of return of an income property, simply divide the income by the market value, or:

RATE OF RETURN = INCOME/VALUE

Keep in mind the rate of return should not be confused with the Capitalization Rate, also known as the Cap Rate.