When rental property is being valued, any number of values can be arrived at depending upon the definition of the value being sought–a real estate investor buys rental property based on the specific value that is important to the investor.

The investment value to an investor is the present worth of future, benefits that will provide a specified target rate of return at the level of risk that is acceptable to that investor. This value implicitly involves the investor’s unique tax shelter requirements, availability of equity, capacity to borrow, management strategies, required rate of return, etc.

For example, suppose the investor requires a return of 6.0% on the capital that must be invested to purchase a series of future cash flows a rental property is expected to generate over time. In this case, both internal rate of return (IRR) and net present value (NPV) might be used to determine whether investment objectives will be met.

The market value estimate, using the income approach to value made by an appraiser involves a market orientation in which the market is researched to provide typical or average values. An appraiser may use a capitalization process that converts an income stream into some present value using market-derived data.

For example, suppose an apartment complex has a verified net operating income NOI) of $150,000 and a market-derived cap rate (C.R.) of 10.0% was determined. In this case, a market value of $1,500,000 for the apartment complex would be determined: NOI / C.R. = Value

The bottom line for real estate investors is to define which type of property valuation is important and apply that value to any rental property being sought.