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 FAQS
  1. What is the long-term outlook of the chemicals sector?

    The long-term outlook for the chemicals sector, as of 2015, is good, primarily due to continuing emerging market opportunities. ... Read Full Answer >>
  2. What does inventory turnover tell an investor about a company?

    The inventory turnover ratio determines the number of times a company's inventory is sold and replaced over a certain period. ... Read Full Answer >>
  3. What level of mergers and acquisitions is common in the chemical sector?

    The level of mergers and acquisitions (M&As) in the chemicals sector has surged to an all-time high since the turn of ... Read Full Answer >>
  4. What proportion of the chemical sector is related to life sciences?

    The subsectors of the chemicals sector that are related to life sciences, pharmaceuticals and agricultural chemicals, make ... Read Full Answer >>
  5. How are C-suite officers measured on performance?

    Evaluation of C-suite officers, especially the chief executive officer (CEO), is an important element of fundamental analysis. ... Read Full Answer >>
  6. How do I perform a financial analysis using Excel?

    Investors can use Excel to run technical calculations or produce fundamental accounting ratios. Corporations use Excel to ... Read Full Answer >>
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 A Rate Hike May Mean For Stocks

    By the end of the year, investors will likely be contending with the first Federal Reserve (Fed) rate hike in nearly a decade.
  8. Fundamental Analysis

    How to Calculate a Coverage Ratio

    In broad terms, the higher the coverage ratio, the better the ability of the enterprise to fulfill its obligations to its lenders.
  9. Investing

    Commercial Real Estate: How to Invest Like a Pro

    Investing in commercial real estate can add stability to your portfolio. Here's how to do it.
  10. Technical Indicators

    Will These High-Flying Stocks Stay Hot in 2015?

    These 10 stocks were on fire in 2014. Will they stay hot?

You May Also Like

Hot Definitions
  1. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  4. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  5. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  6. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
Trading Center