Valuation math: CMA, net operating income, capitalization rate, equity, and property tax

Choose the right relationship

A comparative market analysis, or CMA, estimates a likely selling-price range from comparable properties. Adjust each comparable toward the subject: add for a feature the comparable lacks, and subtract for a feature in which it is superior. A comparable sold for $310,000 but has a garage worth $10,000 more than the subject's garage. Its adjusted indication is $310,000 minus $10,000, or $300,000. Reconcile the indications according to comparability; use an arithmetic average only when the problem directs it.

Income and capitalization

Potential gross rental income minus vacancy and collection loss, plus other income, equals effective gross income. Subtract operating expenses to find annual net operating income, or NOI. Property taxes, insurance, maintenance, and management are operating expenses. Mortgage debt service, income taxes, and depreciation are not NOI deductions. Follow any stated reserve convention.

For example, $100,000 potential rent minus $5,000 vacancy loss plus $2,000 other income equals $97,000 effective gross income. Subtract $37,000 operating expenses to obtain $60,000 NOI. Direct capitalization uses value equals NOI divided by capitalization rate. Convert 8 percent to 0.08: $60,000 divided by 0.08 equals $750,000. Conversely, rate equals NOI divided by value, and NOI equals value multiplied by rate. Holding NOI constant, a higher capitalization rate produces a lower value.

Equity and property tax

Equity equals current property value minus outstanding debt secured by the property. At $750,000 value and $450,000 secured debt, equity is $300,000. Equity is not net sale proceeds: selling expenses also affect proceeds.

For a basic tax calculation, subtract applicable exemptions from the stated assessed value to find taxable value. If assessed value is $300,000 and the problem gives a $50,000 exemption, taxable value is $250,000. At a hypothetical $1.20 per $100, divide $250,000 by 100 and multiply by $1.20, giving $3,000. A mill is $1 per $1,000, so 12 mills means $250,000 divided by 1,000 times 12, also $3,000. These are generic arithmetic examples; actual exemptions, assessment rules, and tax limitations depend on the jurisdiction.

Keep annual income paired with an annual capitalization rate, distinguish value from equity, and check whether a tax rate is a percentage, dollars per $100, or mills.