Income Approach

The income approach values a property by converting its expected income into a present value, most simply by dividing NOI by a market cap rate. It tells you what the property is worth to an investor. Cash on cash return then tells you what that price earns on your cash after financing.

The default property's NOI of $40,210 at an 8% market cap rate supports a value of about $502,600, close to the $500,000 price. If the market rate were 7%, the same income would support about $574,000, and paying $500,000 would look like a bargain.

Working backward is useful too. Pick a target cash on cash return, and the calculator solves for the highest price that still hits it at your loan terms. That price and the income approach value are two different ceilings. A deal worth buying usually clears both.

Further reading: Income Approach on Wikipedia.