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One of the most important tasks investors engaged in real estate encounter is putting a value on their real estate properties. An income-generating real estate property should have a value that corresponds to the property.  It should be neither too expensive nor too cheap.

In order to effectively give value to a real estate property, an investor should make intelligent assumptions that are based on some subjectivity and a lot of market data. A suitable capitalization rate is one of the assumptions an investor should choose. Defined, a capitalization rate is the rate applied to the net, or total, operating income of a property in order to determine its present value.

There are several methods that will help real estate investors compute and determine the capitalization rate of their real estate property. The Market-Extraction Method, the Build-Up Method, and the Band-of-Investment Method are all strategies or ways of determining a real estate property’s capitalization rate. An investor can just choose between these three strategies, or he can also try all three in order to find out which strategy works for him the best.

Investors should take note, however, that the three strategies mentioned can only be applied for real estate properties that are generating income, like industrial properties, apartment houses, or commercial buildings. For an investor, simply guessing a value of a real estate property, without any statistical or factual basis, might only lead to incorrect assessments and eventually, failed investments. Thus, it is always important that an investor chooses the right capitalization rate, in order for him to be able to choose good property investments that generate income.