Value = NOI ÷ cap rate. A property with $250,000 of net operating income is worth about $3,846,000 at a 6.5% cap rate.
Implied cap rate = NOI ÷ asking price. At a $4,200,000 asking price, that same NOI implies a cap rate of about 5.95%, so the asking price is roughly $354,000 above value at your target cap rate.
Net operating income is the property's income after operating expenses, before debt service and income taxes.
What's a good cap rate?
It depends on the property type, location, tenant quality, lease terms and the interest rate environment. A lower cap rate usually means investors see the income as lower risk. Comparable sales are the best guide.
Should I use in-place or projected NOI?
Both are useful. In-place NOI tells you what the property earns today; projected NOI shows what it could earn after lease-up or rent increases. Make sure you know which one a broker's cap rate is based on.
Does cap rate account for financing?
No. Cap rate ignores debt. To see returns after financing, look at cash-on-cash return and debt service coverage alongside it.