A house is priced off what the houses around it sold for. A building with four or more units is priced off what it earns.
That single difference is why two buyers can look at the same fourplex and put numbers $175,000 apart on it, without either of them being wrong.
What does it mean to value a building on its income?
The method has two steps and one piece of arithmetic.
First you work out the building’s net operating income, or NOI: everything it collects in a year, minus everything it costs to run. The mortgage is deliberately left out, because the loan belongs to you rather than to the building. Two buyers with different down payments would otherwise value the same bricks differently.
Then you divide that NOI by the cap rate you require. The cap rate is the yearly return you want on the purchase price, before any borrowing. Required a 7% return on $42,056 of income? That income is worth $600,800 to you.
The formula is just that:
Value = NOI ÷ cap rate
Run it backwards and it tells you something else. Divide the NOI by the asking price instead, and you get the cap rate the seller is offering you.
How do you work out the NOI?
Collect the rent the building would bring in if every unit were let, take off an allowance for empty time, then take off every running cost.
The example building is a fourplex asking $499,000, with four units let at $1,575 a month. Taxes run $6,400 a year and insurance $3,600. The owner pays $450 a month for water, sewer and the shared power. Set aside 5% of the rent roll for repairs, 5% for replacements and 8% for management, and allow 6% for empty time.
| A year | |
|---|---|
| Rent with all four units let | +$75,600 |
| Empty time and non-payment (6%) | −$4,536 |
| Property taxes | −$6,400 |
| Insurance | −$3,600 |
| Water, sewer and shared power | −$5,400 |
| Repairs (5% of the rent roll) | −$3,780 |
| Replacements (5% of the rent roll) | −$3,780 |
| Property management (8% of the rent roll) | −$6,048 |
| Net operating income | +$42,056 |
These are example figures, not a forecast for any market.
Notice what is not on that list. No mortgage payment, no loan interest, no depreciation. Put any of them in and you are no longer calculating NOI, and every valuation built on it will be wrong. The full method is in how to calculate NOI on a rental property.
At the $499,000 asking price, $42,056 of NOI is a cap rate of 8.4%.
What cap rate should you use?
This is the part no formula settles for you. The cap rate is your required return, and it comes from two places: what comparable buildings in the same area have actually traded at, and what you need to earn to make the deal worth doing.
Ask a broker for recent sales of similar buildings nearby, with the income each one was producing. That ratio is the local going rate. It will not be the same two towns over, and a figure quoted for large apartment blocks in big metros tells you very little about a fourplex on a side street.
A lower cap rate means you accept a smaller yearly return, so you can pay more. A higher one means you demand more, so you pay less. Both are defensible. They are statements about risk, not about arithmetic.
| Cap rate you require | What the building is worth | Against the $499,000 asking price | |
|---|---|---|---|
| 6% | $700,933 | $201,933 above | |
| 7% | $600,800 | $101,800 above | |
| 8% | $525,700 | $26,700 above | |
| 8.5% | $494,776 | $4,224 below |
The spread between the top and bottom rows is $206,157 on one unchanged building. Nothing about the property moved. Only the return the buyer insisted on.
It also shows where this seller’s price sits. Any buyer happy with less than about 8.4% can pay the asking price and still hit their number. A buyer who requires 8.5% cannot.
What does the price per unit tell you?
Divide the price by the number of units and you get $124,750 a unit on this building. It is a quick way to line up three listings, and it is the figure brokers quote first.
Treat it as a sorting tool. Price per unit says nothing about what those units rent for, who pays the water bill, or whether the roof has five years left. A $90,000-a-unit building full of $700 rents can be worse value than a $124,750-a-unit building full of $1,575 rents.
Use it to decide what deserves a closer look, then value the income.
What the loan does to the price you can pay
Your valuation sets a ceiling. The lender sets a second one, and you are held to the lower of the two.
Freddie Mac caps a purchase mortgage on a 2 to 4 unit investment property at 75% of value, against 85% on a single unit. On a $499,000 fourplex that is $374,250 of loan and $124,750 of down payment before any closing costs, which is a different proposition from the 20% most people picture.
At five units and above you leave home loans behind entirely and borrow commercially, where the terms, the deposit and the length of the loan all change.
Where this valuation can mislead you
The method is only as honest as the NOI you feed it, and the NOI is where a seller’s sheet does its work.
- Rents that nobody pays yet. A pro forma quotes every unit at the rent the owner hopes to get. Value the rents on the signed leases.
- The vacancy allowance. The 6% above is the example’s assumption. Nationally, the Census Bureau put the rental vacancy rate at 7.3% in the second quarter of 2026, in a release dated 28 July 2026, and a single building can sit well off that in either direction. More on picking the figure in what vacancy rate you should use.
- Missing costs. Repairs, replacements and management are the three most often left off. Together they are $13,608 a year here, which at a 7% cap rate is $194,400 of value.
That last point is worth repeating. Leave out one $3,780 line and you have overvalued the building by $54,000.
Put the leases, the real tax bill and an insurance quote into the multifamily calculator and read the cap rate it gives you at the asking price. If you want the whole deal rather than the valuation, work through how to analyze a multifamily property, and for how the cap rate differs from your return on cash, see cap rate against cash-on-cash return.