Professional appraisers use three distinct methodologies to value real estate. Each approach answers the same question — what is this property worth? — but from a different angle. Understanding when to apply each method, and how to run the numbers yourself, gives you a significant edge as an investor, agent, or buyer navigating any transaction.

Most valuations use more than one approach as a cross-check. When multiple methods converge on a similar value, confidence is high. When they diverge significantly, that's a signal to dig deeper into why.

Method 1 of 3
Income Approach
Best for: Investment Properties, Multifamily, Commercial
The income approach values a property based on the income it produces. It's the primary method for any property where an investor would purchase primarily for cash flow — rental homes, apartment buildings, commercial spaces. The logic is simple: the value of an income-producing asset is a function of its income stream.

The two most common income approach formulas are direct capitalization (using cap rate) and gross rent multiplier (GRM).

Direct Capitalization

Value = Net Operating Income ÷ Cap Rate
Income Approach Example
Annual Gross Rent$24,000
Less Operating Expenses (40%)−$9,600
Net Operating Income (NOI)$14,400
Market Cap Rate6.5%
Indicated Value ($14,400 ÷ 0.065)$221,538

Gross Rent Multiplier (GRM)

GRM is a faster, less precise version of the income approach. It divides the purchase price by annual gross rent. A property selling for $220,000 with $24,000 in gross annual rent has a GRM of 9.2. Lower GRM = better yield. Useful for quick screening but doesn't account for expense differences between properties.

Method 2 of 3
Sales Comparison Approach
Best for: Single-Family Homes, Condos, Vacant Land
The sales comparison approach values a property by comparing it to similar properties that have recently sold in the same market. This is the method appraisers most commonly use for residential properties and the basis of every CMA a real estate agent prepares. Value is established by what the market has actually paid for comparable properties — adjusted for differences.

The adjustment process is what separates a rigorous comp analysis from a superficial one. You identify properties sold within 90 days in the same market, then make dollar adjustments for every meaningful difference: square footage, bedroom/bathroom count, lot size, garage, condition, features, and location within the neighborhood.

Key principle: Adjustments flow from the comparable to the subject. If the comp has a feature the subject doesn't — subtract from the comp's value. If the subject has something the comp doesn't — add to the comp's value. You're adjusting what the comparable would have sold for if it matched the subject property.

Method 3 of 3
Cost Approach
Best for: New Construction, Unique Properties, Insurance
The cost approach values a property by estimating what it would cost to rebuild it from scratch today — land value plus the replacement cost of the improvements, minus depreciation. It's most accurate for new construction (little depreciation) and most useful for properties where comparables are scarce, such as churches, schools, custom homes, or specialty properties.
Value = Land Value + (Replacement Cost − Depreciation)

Depreciation in the cost approach includes physical deterioration (wear and tear), functional obsolescence (outdated floor plan, dated features), and external obsolescence (factors outside the property — industrial neighbor, declining area). An older property may have significant depreciation applied even if it's been well-maintained.

Which Method Should You Use?

Use the Property Value Estimator and Cap Rate Calculator to run income approach valuations, and the Price Per Square Foot Calculator to support your sales comparison analysis.