Income Approach

At times the Income Approach seems confusing to people. There’s no reason for it not to be. It really isn’t used often in everyday residential appraisals. 

The Income Approach is used primarily for income producing properties such as rentals or leased real estate. Investors in general are the ones that benefit from this analysis. It gives them an idea of how much to pay for a property based upon the potential gross income which can be derived from it in the marketplace which is the market value.

However, it can be utilized to extract a market value from a market area that has sufficient rental properties. There is a formula that is used that says if you take the annual net operating income (NOI) from a rental property and divide it by a constant capitalization rate you get the current market value of the property.

Therefore you can extract the  CAP Rate from the market then divide it into the net operating income and you will get the market value of the property. This in turn can be analyzed against the values you received from the Sales and Cost Approaches from our earlier posts to see how closely they compare.

Often there is insufficient rental data to determine a value by the Income Approach in residential appraisals. Commercial appraisals use this appraoch regularly.

 

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