The income approach is one of three techniques commercial real estate appraisers use to value real estate. It s used for income producing properties and is somewhat similar to the discounted cash flow method of valuation used in finance.
Updated july 29 2019 when a property s intended use is to generate income from rents or leases the income method of appraisal or valuation is most commonly used.
Income approach real estate. The income approach is one of three methods used to appraise real estate. The fundamental math is similar to the methods used for financial valuation securities analysis or bond pricing. The income approach is a real estate valuation method that uses the income the property generates to estimate fair value.
The net income generated by the property is measured in conjunction with certain other factors to calculate its value on the current market if it were to be sold. The income approach is one of three major groups of methodologies called valuation approaches used by appraisers. The income approach to property valuation is suitable for income producing real estate.
The income approach to valuation is used by both real estate investors and lenders to estimate the market value of a property. Within the approach there are three. It s calculated by dividing the net operating income by the capitalization.
It weighs the potential income of the property to the purchase price. Compared to the other two techniques the sales comparison approach and the cost approach the income approach is more complicated and therefore it is often confusing for many commercial real estate professionals. It is particularly common in commercial real estate appraisal and in business appraisal.