1. What is the Income Approach?

The income approach is a real estate valuation method that estimates property value based on the income the property generates. It's particularly useful for rental properties and commercial real estate investments.

2. How Does the Calculator Work?

The calculator uses the income approach formula:

Where:

• \( NOI \) — Net Operating Income (annual income after operating expenses)
• \( Cap\ Rate \) — Capitalization Rate (expected rate of return)

Explanation: This method converts the property's income stream into an estimated market value by dividing the net operating income by the capitalization rate.

3. Importance of Property Valuation

Details: Accurate property valuation is crucial for investment analysis, financing decisions, property sales, tax assessments, and insurance purposes.

4. Using the Calculator

Tips: Enter NOI in USD per year and Cap Rate as a decimal (e.g., 0.08 for 8%). Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good cap rate?
A: Cap rates vary by market and property type. Generally, 4-10% is common, with higher rates indicating higher risk/return potential.

Q2: How do I calculate NOI accurately?
A: NOI = Gross Rental Income - Operating Expenses (excluding mortgage payments and income taxes).

Q3: Why use the income approach instead of comparables?
A: The income approach focuses on the property's income-generating potential, making it ideal for investment properties rather than primary residences.

Q4: Are there limitations to this method?
A: This method assumes stable income and expenses, and may not account for property-specific factors or market fluctuations.

Q5: Should this valuation be used for mortgage applications?
A: Lenders typically use multiple valuation methods, including comparables and cost approach, for mortgage underwriting.