How Do I Know What A Property is Worth?

David Crook gives a very useful explanation of figuring out value from his book, The Complete Real-Estate Investing Guidebook.  

The best way to determine a building's worth is to figure out its capitalization rate or "cap rate".  This is the ratio between what the building costs and what it makes.  The cap rate is determined by dividing the yearly net operating income (nonmortgage expenses)/the purchase price.  If you had $26,000 of net operating income and a purchase price of $400,000 then you would have a 6.5% cap rate or return on your investment.  

This would be your return if you bought the building with all cash.  The higher the cap rate, the higher the return.  This is why the purchase price is so important.  Non-mortgage expenses don't change particularly but sales prices do.  The cap rate tells a real estate investor what a P/E ratio tells an investor in stocks. 

Another less accurate approach is the gross rent multiplier which is the price/yearly gross income.  Buyers want as low a GRM as possible.  This metric does not factor in costs though so you shouldn't rely on it alone.