Book Value

Book value is an asset's cost less accumulated depreciation, as recorded on a balance sheet. For real estate it often has little to do with what the property is worth. Market value follows NOI, while book value just follows the depreciation schedule.

The default house goes on the books at $500,000. After ten years of depreciation on the building, its book value is about $354,500. If NOI has grown over those years, the market value may be well above $500,000 at the same time.

Investors reading a company's or fund's balance sheet should keep the gap in mind. A real estate owner with low book values and strong NOI may be worth much more than its accounts suggest. Valuing each property on NOI and a market cap rate closes the gap.