Income Approach

AAA

DEFINITION of 'Income Approach'

A real estate appraisal method that allows investors to estimate the value of the property based on the income produced. The income approach is computed by taking the net operating income of the rent collected and dividing it by the capitalization rate (the investor's rate of return). It is most typically used for income producing properties and the formula is:



Market Value= Net Operating Income






Also called the "income capitalization approach".

BREAKING DOWN 'Income Approach'

The income approach is one of three popular approaches to appraising real estate . The others are the cost approach and the comparison approach. Often most important for hotels, apartments and office buildings.



Because the income approach methodology looks at the rents and values of real estate in the area, it may not take into account features that a piece of property may have, the condition of the property, the exact neighborhood or financing concessions. As such, people looking to invest in property use the income approach as a quick snapshot of what property might be worth.

RELATED TERMS
  1. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  2. Net Operating Income - NOI

    A company's operating income after operating expenses are deducted, ...
  3. Capitalization Rate

    A rate of return on a real estate investment property based on ...
  4. Comparables

    A valuation technique in which a recently sold asset is used ...
  5. Valuation

    The process of determining the current worth of an asset or company. ...
  6. Appraisal

    A valuation of property (ie. real estate, a business, an antique) ...
Related Articles
  1. Home & Auto

    Top 6 Mortgage Mistakes

    These common errors could end in foreclosure.
  2. Mutual Funds & ETFs

    Add Some Real Estate To Your Portfolio

    From REITs to owning your own home, find out how diversify your portfolio with real estate assets.
  3. Home & Auto

    Condo Complications: The Issues Behind Ownership

    Being a "condo person" is just one of the issues you'll have to examine when deciding if a condo is right for you.
  4. Home & Auto

    10 Tips For Getting A Fair Price On A Home

    Don't let buying a home bust your budget. Make sure the house you choose is worth the price you pay.
  5. Home & Auto

    Flipping Houses: Is It Better Than Buy and Hold?

    Real estate investors can flip a property or use it for cash flow. Find out which will work in your neck of the woods.
  6. Home & Auto

    Reverse Mortgage Pitfalls

    Before tapping your home equity, find out what can go wrong.
  7. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  8. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  9. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  10. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  3. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  4. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How are American Depository Receipts (ADRs) priced?

    The price of an American depositary receipt (ADR) is determined by the bank or other financial institution that issues it. ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  2. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  3. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  4. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  5. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  6. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!