In appraisal for investment property, which approach is used to estimate value based on expected income?

In appraisal for investment property, which approach is used to estimate value based on expected income?

• A. Sales comparison approach.
• B. Cost approach.
• C. Income approach.
• D. Replacement value approach.

Answer: (C)

The income approach is used because it estimates value from the property’s ability to generate cash flow. For investment property, the key is the expected income it will produce, typically measured as net operating income (NOI) after operating expenses and vacancy. Appraisers convert that income into value either by direct capitalization (NOI divided by a market cap rate) or by a discounted cash flow analysis that projects multiple years of cash flows and discounts them to present value, often including a terminal value at the end. For example, if the expected NOI is $100,000 and the market cap rate is 5%, the value would be about $2,000,000 ($100,000 ÷ 0.05). This approach specifically focuses on income generation, unlike the other methods. The sales comparison approach bases value on prices of similar recently sold properties, and the cost approach estimates value from the cost to replace the property minus depreciation (replacement value is a form of that cost-based method).

The income approach is used because it estimates value from the property’s ability to generate cash flow. For investment property, the key is the expected income it will produce, typically measured as net operating income (NOI) after operating expenses and vacancy. Appraisers convert that income into value either by direct capitalization (NOI divided by a market cap rate) or by a discounted cash flow analysis that projects multiple years of cash flows and discounts them to present value, often including a terminal value at the end.

For example, if the expected NOI is $100,000 and the market cap rate is 5%, the value would be about $2,000,000 ($100,000 ÷ 0.05). This approach specifically focuses on income generation, unlike the other methods. The sales comparison approach bases value on prices of similar recently sold properties, and the cost approach estimates value from the cost to replace the property minus depreciation (replacement value is a form of that cost-based method).