Significance of ARV based on cap rate

[David Stafford]

Just trying to get my head around this concept. What is the significance of the ARV based on area's typical cap rate?

I ran numbers on BP Rental Property Calculator and under Financial Projections is "ARV based on Cap Rate". I understand how the math works, I just don't know how to evaluate the answer.

For example typical cap rate in the area is 8%. My net operating income is $15,000, so ARV based on 8% cap is $187,500 - but what is this telling me?

Thanks

[Jon Holdman]

For income producing commercial properties, the combination of the actual income and the prevailing cap rate for similar properties in the same area will give you the value.  This is called the "income method" when doing an appraisal.  Commercial properties are all about the income they produce.  For your example, assuming 8% is the prevailing cap rate for that type of property in that area, the $187,500 would be the selling price.

If you're trying to apply this to SFRs and small properties, though, you cannot.  Those properties are valued based on comps, not income.