Capitalization rate connects annual net operating income with property value. For direct capitalization, value equals net operating income divided by the capitalization rate. Use our example: thirty thousand dollars of annual net operating income divided by zero point zero six equals five hundred thousand dollars. Convert six percent to a decimal before dividing. Hold income steady and raise the rate to eight percent. The indicated value falls to three hundred seventy-five thousand dollars. Also remember that net operating income is calculated before debt service; do not subtract mortgage payments to find it. Quick check: with the same income, does a higher cap rate produce a higher indicated value? No. A higher rate produces a lower indicated value when income stays the same.