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
Capitalization Rate




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.

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. Investing

    What Happened To Obama’s Amnesty Bill?

    The sweeping Republican majorities were supposed to trigger change, but now they are preparing to embrace the Obama immigration policy.
  8. Mutual Funds & ETFs

    Why Monthly Dividend ETFs are Good for Everyone

    Monthly dividend ETFs can help ease the financial stress on investors of all ages. Here are a few fund names for you to consider.
  9. Investing Basics

    The Strange New World Of The Bitcoin Exchange Futures Market

    We explain the basics of the Bitcoin exchange and futures market.
  10. Fundamental Analysis

    What is the difference between the acid test ratio and working capital ratio?

    Using liquidity ratios to determine the financial stability of a company is an important tool to accounting professionals and investors.

You May Also Like

Hot Definitions
  1. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  2. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  3. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  4. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  5. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  6. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
Trading Center