Methods Used To Determine Value – Income Capitalization Approach

The "Income Capitalization Approach" is the most commonly used method in determination of market value for income-producing properties. This method takes the income earned by the real estate and converts that income into value. This approach is most often used for commercial property, multi-family residential property, and single-family residential property that are rented or in neighborhoods with a substantial rental market. Due to lack of adequate rental data, this method may be a less reliable indicator of market value for properties that are predominately owner-occupied or located in predominately owner-occupied market areas.

With this approach, there are different methods for converting income into value. For residential property, a gross rent multiplier is often applied to the market rent to determine value. Different, detailed methods are used for commercial property called direct capitalization and yield capitalization. These methods adhere to the sophistication of the investors in the commercial market by analyzing market rent or gross income, lease data, vacancy and collection losses, operating expenses, capitalization rates, discount rates, etc.