Definitions for "Income Approach"
an estimated value based on the capitalization of income and productivity; the income approach to value; the economic approach to value; an approach concerned with the present worth of future benefits of the property. definition of income approach defined income approach to value defined definition of economic approach to value defined appraiser's cost approach
One of the 3 major approaches to value estimation. It is based on the idea that a propertyâ€(tm)s ability to generate net income creates value. That is, a future net income stream commands a price in the market place for which there are buyers and sellers. This relationship can be expressed as follows: V = I/R where: V = value of the property or investment I = net income generated over a given time period R = rate of return, aka capitalization rate So, in order to estimate value by way of the Income Approach, two components need to be established: annual net income and rate of return. Of course, since it is a simple equation, as long as any two components are known, the third can be calculated.
One of the three methods of the appraisal process generally applied to income producing property, and involves a three-step process. (1) find net annual income, (2) set an appropriate capitalization rate or “present worth” factor, and (3) capitalize the income dividing the net income by the capitalization rate.