How To Evaluate an Income Property

Investors looking to sell or buy an income property look at different tools  to determine value. The tool that overcomes the weakness of the Gross Rent Multipller (GRM) is the Capitalization Rate (Cap Rate).  The GRM is a quick study in value, it's the property's gross annual rents (before operating expenses) times the market area GRM to get an estimate of value, arrived at by comparing comparable sales and the average of their gross rents.  Gross Scheduled Income of $120,000 x 10 GRM would mean a $120,000 property value.

However, to get a more accurate value, a cap rate and the net operating income (NOI) takes into account expenses: $120,000 NOI / .08 market cap rate = $1,500,00 sales price.   But a higher cap rate at .0925 would decrease the sales price (or offer price) to $1,297,300.

However, not all properties on the market display complete expenses and the listings may not show a cap rate, in which case, that information has to be requested of the seller who may not send it over until escrow has opened, or the buyer/investor uses his/her own skill i estimating what expenses may be based on current knowledge  about the property. Your agent should be able to help you with this to obtain the most complete information/estimate at least during escrow, if not before making an offer.