What does it cost to run this property? That is  the next component to understand. Expenses include such things
as:

Property taxes
Insurance premiums
Utilities
Gardening costs
Management fees
Maintenance and repair costs
Vacancies, etc.

Note that you will not be including interest expense here for  the capitalization-of – income approach assumes you paid all cash  for your building (even though you didn’t).  Although getting an accurate analysis of expenses may be easier  said than done, it is still imperative that you do so. One owner  might not pay for professional management yet another may, and  one owner may have rents too low and another may be right on.

Whatever the case, finding out what the expenses actually are is  critical to determining if the property is a sound investment.  Often, appraisers are forced to estimate the expenses for a certain  property based on the type of property that is being appraised and the area where it is located. Obviously, a duplex with no amenities  has far less expenses than a full-security building with tennis  courts and extensive landscaping does. Similarly, the cost of heating  a building in Boston, for example, will be considerably more than  heating one in Arizona. Remember that these types of size and regional  differences must be accounted for when analyzing expenses.

The final item needed for this valuation method is the expected capitalization rate. The capitalization rate is determined by understanding how much of a return investors can expect to realize in a particular market. The rate will vary in different parts of the country, in different parts of a city, even in buildings within a few blocks of each other.

Additionally, residential, commercial, and industrial properties also have varying capitalization rates. Remember, because the capitalization rate measures the profitability of an investment, certain types of properties involve other risks and thus dissimilar profit possibilities.

Before all the hype about stocks, back in the Dark Ages of investing, novice investors put everything into savings accounts. After a few years of experience, they ventured into the bond market. Five years playing with government bonds led to another five years investing in corporate bonds. Having built up capital and emotional tools, these apprentice investors then bought utility stocks, blue chip stocks, or real estate. Another decade or so and they were ready for speculation in tech stocks, emerging market stocks, commodities, and anything else the markets could throw at them. At each stage of development, the investor learned the emotional twists and turns of investing along with the knowledge of companies and markets.

Today, investors start with tech stocks, possessing little knowledge of companies or markets and never building the emotional skills needed to handle the most challenging investments. Each stage of investment maturity triggers different emotions. Saving triggers different emotions than investing, which in turn triggers different emotions than speculating. Some of you have MBAs or CPAs and can quickly pick up company and market data. Others are therapists or trained emotionally to handle conflicts. Most readers are neither. This chapter will define common types of emotional traps you will encounter with investments. Chapters 4, 5, and 6 will show how savings, investments, and speculations trigger emotional reactions. Then, Chapter 7 shows how portfolio structure can twist your emotions. These five chapters will give you the emotional information equivalent to that of a 20-year, full-time investor. Step 2 will raise your level of self-knowledge so that you can determine what investments are appropriate for you.