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".
Investopedia explains '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.