What does the formula I / V = R calculate in real estate?

The formula I / V = R represents a relationship where I stands for income, V represents value, and R is the rate of return or capitalization rate. Within the context of real estate, this formula is primarily used to assess the performance of an investment property by calculating the rate of return based on its net operating income (NOI) and property value.

In this scenario, when you take the net operating income (what the property generates in revenue after expenses) and divide it by the property value, you are essentially evaluating the cap rate. The cap rate is a crucial metric in real estate investment as it provides insights into the potential return on investment and helps investors compare the profitability of various properties.

By translating this formula into net operating income divided by property value, it becomes apparent how effective the property is generating income relative to its worth. This allows investors to make informed decisions regarding property acquisitions, valuations, and overall market conditions.