An appraiser or investor may use several strategies to determine the estimated value of a property. The three most popular procedures for evaluating income property are;
     A. Income approach;
     B. Cost Replacement;
     C. Market Comparison.
If a project has stabilized in occupancy (in other words it has achieved a level of occupancy that would be considered satisfactory within its marketplace) and the income approach is being used, the theory of capitalization may be one method utilized. To complete this method, the appraiser or investor must determine a "fair" or "market" capitalization rate (cap rate) that would satisfy the typical lender and/or investor. A cap rate is developed to determine the amount of return an investment should yield. The cap rate is determined through the synergy of certain information based on the particular method being used. An important rule: when formulating the data to be used to develop a cap rate be sure to use information that is considered "typical" or "average" to that project within its general marketplace. Do not use information specific to one lender - one investor or to a project outside the immediate market. Example: If the average interest rate for a project is 8.0% and you have found a lender who is aggressive towards this particular type of loan or project who is offering 7.5%, you must use the 8.0% as data. Many lenders will used a "market" cap rate to determine the estimated value of a project then, develop their "internal" cap rate as a comparison. An important consideration is this: All methods to determine a cap rate use as one of their components the loan’s constant (which is a derivative of the interest rate and amortization period). Therefore, those developing a cap rate should be aware of the loan’s importance in determining the cap rate and subsequent value of a project based on the income approach and the theory of capitalization. Real estate marketing agents in particular should take in consideration the age of the property (which might affect the amortization term) and the interest rate available before trying to determine a fair listing price or purchase offering. (For evaluation process, see also the definition under Discounted Cash Flow Analysis).