The Income Approach. This method analyzes a property’s income producing capability and then capitalizes the future income to indicate present value. If there are leases on the property, actual rents will be scrutinized. Comparable property rentals will also be researched and adjusted to consider such factors as market conditions, location, or physical characteristics of the comparable lease. The appraiser then subtracts the expenses of the property. The resulting net income is then “capitalized”, which rate is determined by a various factors including the returns on other investments, taking into account mortgage, equity components, and risk. The rate of capitalization should be a reflection of the market, i.e., what an investor would require from an investment in a property of similar age, kind, and condition. The resulting “cap” rate (expressed as a percentage) is then divided into the net income to indicate a value for the property. The lower the “cap” rate, the higher the value of the property. Conversely, the higher the “cap” rate, the lower the value. Next in Part 5: Reconciliation.
