Definition
A property valuation method based on the income stream it generates, using capitalization rates to convert annual income into present value. It's how commercial properties are valued, where buildings are essentially money-printing machines worth whatever those dollars command.
Example Usage
Using the income approach with a 6% cap rate, the apartment building generating $300,000 annually was valued at $5 million.
Origin
Investment appraisal methodology formalized in early 20th century institutional real estate finance
Fun Fact
The income approach dominates commercial real estate valuation because, unlike homes, these properties are bought primarily for investment returns rather than personal use.
Source: Appraisal Institute valuation standards
Related Terms
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