In recent times, the desire to possess property is growing at a faster rate. Every individual aims to own some assets at some point in time because investments have become an important factor to increase financial stability. Often, while dealing with the property market, the term Income Approach comes into the picture.
Income Approach precisely means appraising the fair market value of a property based on its present and potential earnings, profitability and the risk that such investment carries for the future.
Following the income approach is significant for people who are looking to own a property based on its income potential. They purchase the property as an investment with the hope to generate returns on it in the future. The income approach is calculated by discounting the capitalized net operating income of the property to determine its fair value. The capitalization rate represents the risk factor that the investment contains.
Some of the key features of the Income Approach are as below:
Future value: The Income Approach is one of the best possible ways to get an idea of the fair value of the property. It gives an estimate that in the future what will be the rate of the investment properties.
Helps in preventing risk: A blind investment will not lead a person anywhere. The job of the evaluator is to evaluate the valuation of the property. This gives a safe guideline in real estate for investment. To know the market value of the property at present before investing is very important. This gives the idea of how much one can spend.
Generation of income: In real estate, when properties are talked about it is mainly about the value of the commercial property. Such properties need valuation because once commercial activities start in such properties huge income starts to generate further raising the fair value of such commercial properties as well.
Maintenance charges: Income Approach also depends upon factors like costs of maintenance, repair, and how well a property is looked after. The better the condition of the property, the estimation of the value will tend to go higher.
A general view of the Income Approach reflects that investment must be done in a property that will serve a commercial purpose. If such a property can be maintained well, in the long run, it will generate lump sum income from commercial properties.
