Income Approach Real Estate

The income approach is a real estate valuation method that uses the income the property generates to estimate fair value.

Income approach 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. There are three approaches to value real estate. The income approach is one of three techniques commercial real estate appraisers use to value real estate. In this part we will discuss the income approach for valuing real estate.

Income capitalization approach as we have mentioned is one of the three main methods used by real estate appraisers and real estate investors to estimate the value of an investment property. The net income generated by the property is measured in conjunction with certain other factors to calculate its value on the current market if it were to be sold. In real estate valuation part 1 we discussed the complexity of valuing real estate. They were the cost approach and sales comparison approach.

The income approach is one of three major groups of methodologies called valuation approaches used by appraisers it is particularly common in commercial real estate appraisal and in business appraisal. To calculate the noi start by annualizing the property s rental income and subtracting a vacancy. The fundamental math is similar to the methods used for financial valuation securities analysis or bond pricing. When a property s intended use is to generate income from rents or leases the income method of appraisal or valuation is most commonly used.

The income approach sometimes referred to as the income capitalization approach is a type of real estate appraisal method that allows investors to estimate the value of a property based on the. He is asked to calculate the capitalization rate of a real estate investment for a client using the income approach valuation method and determine the property s present value. In essence it focuses on the income the investment property produces. Nicholas uses the income statements of the property to calculate the interest before depreciation interest and taxes ibdit at 85 000.

It is calculated by dividing the net operating income by the capitalization rate. This method requires the most calculations to be done which can be tricky but gives some of the most accurate results.