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Capitalization rate connects annual net operating income with property value.

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For direct capitalization, value equals net operating income divided by

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the capitalization rate.

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Use our example:

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thirty thousand dollars of annual net operating income divided by

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zero point zero six equals five hundred thousand dollars.

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Convert six percent to a decimal before dividing.

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Hold income steady and raise the rate to eight percent.

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The indicated value falls to three hundred seventy-five thousand dollars.

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Also remember that net operating income is calculated before debt

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service; do not subtract mortgage payments to find it.

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Quick check:

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with the same income, does a higher cap rate produce

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a higher indicated value?

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No.

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A higher rate produces a lower indicated value when income

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stays the same.