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.