Income Approach Formula Commercial Real Estate

The value is established here by estimating the property s income using the capitalization rate commonly referred to as merely the cap rate.

Income approach formula commercial real estate. Compared to the other two techniques the sales comparison approach and the cost approach the income approach is more complicated and therefore it is often confusing for many commercial real estate professionals. Also referred to as the income capitalization approach this tactic is the one most commonly used in commercial real estate transactions. The income approach includes two methods the simpler of the two is the direct capitalization method which this post will cover. It s calculated by dividing the net operating income by the capitalization.

This approach is usually most appropriate for income producing commercial properties. In commercial real estate there are a few generally accepted methods for appraising or valuing real property. The income approach applies a multiplier called a capitalization rate to its income.