Income Approach
A valuation method that estimates a property's value based on the income it generates or is expected to generate. It converts anticipated future benefits (rental income) into a present value estimate.
The income approach is the primary method for valuing investment and income-producing properties. It operates on the principle of anticipation — the value of a property is the present worth of the future benefits it will produce. Two main techniques are used: direct capitalization, which divides a single year's net operating income by a capitalization rate, and yield capitalization (discounted cash flow), which discounts projected future cash flows to present value. For residential properties, the gross rent multiplier (GRM) technique is a simplified version often used for 1-4 unit properties.
Related Terms
Capitalization Rate (Cap Rate)
Cap RateThe ratio of a property's net operating income to its market value or sale price, expressed as a percentage.
Net Operating Income (NOI)
NOIThe annual income remaining after deducting all operating expenses from effective gross income, but before deducting debt service (mortgage payments) and income taxes.
Gross Rent Multiplier (GRM)
GRMThe ratio of a property's sale price to its gross monthly (or annual) rental income.
Discounted Cash Flow Analysis (DCF)
DCFA yield capitalization technique that estimates property value by projecting future cash flows (income minus expenses) over a holding period and discounting them to present value using a market-derived discount rate..
Effective Gross Income (EGI)
EGIPotential gross income minus vacancy and collection losses, plus other income (laundry, parking, late fees).
More in Valuation Approaches
View allSales Comparison Approach
A valuation method that estimates a property's value by comparing it to similar properties that have recently sold in the same market area.
Cost Approach
A valuation method that estimates value by calculating the cost to reproduce or replace the improvements, subtracting accrued depreciation, and adding the land value.
Market Value
The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus..
Reconciliation
The process by which an appraiser evaluates and weighs the results from the different valuation approaches (sales comparison, cost, and income) to arrive at a final opinion of value..