Income Approach
Candlefocus EditorThe income approach leverages both past and present financial information about a property to calculate its present market value. It’s based on the premise that investors will pay more for an income-generating property than they would for an otherwise equivalent property that doesn’t generate any income.
Real estate investors generally use the income approach when considering whether to purchase a property because it takes the greatest account of the varying income-generating potential of different properties. When an investor is buying a property, they will consider its future income streams in addition to the initial purchase price.
The income approach is based on a few key elements. Firstly, it takes into account the income a property is currently generating. This includes rent and other forms of income such as advertising revenue, which is generated from signs on the property or fees for services such as laundry or parking. Secondly, it takes into account the potential income a property may generate in the future. This can be estimated from past rental data, projected rental increases and other potential rental income.
Finally, the income approach also considers the costs associated with maintaining, operating and improving the property. These costs include taxes, insurance, maintenance and repairs, as well as potential improvements that could increase the property’s value.
The income approach is a useful tool for investors who are considering making a real estate purchase, as it takes all of these factors into account when calculating the current value of a property. Ultimately, the goal of the income approach is to provide investors with an accurate estimation of the present market value of a property.