Business Definition for: income approach
income approach
income approach
one of three approaches to appraising real estate. (The others are the
cost approach
and
direct sales comparison approach
.) Typically considered the most important for
apartments
,
office buildings
, hotels, and
shopping centers
. Two principal methods are
direct capitalization
, which is based on 1 year of income, and
discounted cash flow
, based on a multiple-year
projection period
and
reversionary value
.
Expected annual income
Capitalization rate |
= |
Market value |
Example: A property is expected to produce a
Net Operating Income
of $100,000 yearly. Recent sales data indicate that the
capitalization rate
for
comparable
properties is 10%. By the income approach, the property has a market value of
$100,000
.10 |
= |
$1,000,000 |
See also
capitalization
,
discounted cash flow
Related Terms:
rate of interest used to convert a series of future payments into a single present value.
in real estate, sales price divided by the contract rental rate; a method of estimating the value of income-producing real estate that is somewhat crude since it fails to consider operating expenses, debt service, and income taxes. For example, if the sales price is $400,000 and the gross monthly contract rent is $4,000, then the GRM = $400,000 ÷ $4,000 = 100. GRM may also be expressed as the number of years of rent equaling the purchase price (GRM = $400,000 ÷ $48,000 annual rent = 8.333).
- total amount of the various securities issued by a corporation. Capitalization may include bonds, preferred and common stock.
- a technique used by real estate appraisers to convert the income of a property into a value estimate for that property.
value of future expected cash receipts and expenditures at a common date, which is calculated using Net Present Value or Internal Rate of Return and is a factor in analyses of both capital investments and securities investments. The net present value (NPV) method applies a rate of discount (interest rate) based on the marginal cost of capital to future cash flows to bring them back to the present. The internal rate of return (IRR) method finds the average return on investment earned through the life of the investment. It determines the discount rate that equates the present value of future cash flows to the cost of the investment.
Referring Terms:
Copyright © 2007, 2000, 1997, 1987, by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
Copyright © 2004, 2000, 1997, 1993, 1987, 1984 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
