It is a real advantage for real estate analysts to determine the value of an investment property quickly. When we might not have access to our computers and real estate investment software, or (forgive me) might just want to remind ourselves that we can still do the math on a napkin over lunch.

Nonetheless, investment real estate property such as multi-family units, office buildings, and similar residential and commercial properties that generate rental income sometimes require a rough real estate valuation on the spot.

Step One: Determine net operating income.

Collect this information from the MLS listing, from the listing agent, or directly from the property owner. It is important to start the real estate valuation with a somewhat realistic net operating income.

Step Two: Determine the desired rate of return.

Collect this information by asking your real estate investors for the cap rate or yields desired, or use a cap rate that you believe is current to similar properties available in your market area.

Step Three: Calculate the real estate valuation.

Net Operating Income (NOI) divided by Cap Rate = Value

For example, suppose an apartment building just came on the market listed for $600,000 and you want a rough estimate of its value to see whether you should forego lunch and call your investor. The net operating income is $31,140 and from your knowledge of the market, similar investment properties in the area are selling at a cap rate of 6.23%. Solve for real estate value simply by dividing $31,140 (NOI) by 6.23% (cap rate). Your computation indicates a real estate value of $500,000.

Assuming that you are paying close enough attention to income property sales and listings in your market area to feel confident in your numbers, you discover rather quickly that the new $600,000 listing appears to be over priced by $100,000.

You still might call for the marketing package, or recalculate the numbers on your computer. The point is (at least from your primary calculations) that you do not need to make an urgent call to your customer and interrupt lunch. The new listing appears less than a great deal. Go ahead and finish lunch, it is safe to assume that the property will still be available in two hours.