Definition
The income approach values properties based on income they generate. Monthly rent multiplied and capitalized using a cap rate yields property value. Essential for evaluating investment property purchases.
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The income approach is essential for valuing income-producing properties by analyzing potential rental income and converting it to a present value through capitalization. This method is most appropriate for multi-family properties, commercial real estate, and investment properties where income generation is the primary value driver. Key metrics include gross rental income, operating expenses, net operating income, and capitalization rate.
Pro Tip
Use income approach for investment properties to ensure rental income supports your purchase price and loan terms.
Example
A duplex generates $2,000 per month in rental income with annual expenses of $4,800. Using a cap rate of 6%, the income approach calculates value as $400,000 ($24,000 annual net income divided by 0.06).