The income approach is most commonly used for rented residential and commercial properties. This includes apartment buildings, office and commercial buildings, as well as shopping centers, parking garages, and logistics facilities.
The starting point is the annual net income. This refers to the rental income minus the costs for maintenance, administration, and potential vacancies that the owner has to bear. The next step is to determine the land value. This is usually done using a comparative sales approach . From these two factors—the land value and the amount of rental income—the final total income value is calculated.
A distinction is made between a simple income approach and a comprehensive one. In the former, the land value and the resulting land value return are disregarded. Only the value of the building erected on the land is considered in the valuation.
The full income approach also incorporates the interest on the land value. This is done using a comparative sales approach. For this purpose, the property interest rate is used. It is determined by the local valuation committees based on past real estate transactions.
In the income approach, only the land value is capitalized at this property interest rate, not the building constructed on it. This is because the value of the land is subject to fluctuations; the value of the building, on the other hand, tends to decrease with age and wear and tear. If a building is not continuously and comprehensively invested in, the achievable rent also decreases.
Just as with the comparative and asset-based valuation methods, the income approach also incorporates circumstances into the calculation that either decrease or increase the value. For example, if the buyer of an apartment building has to expect to replace the roof structure in the foreseeable future, this is already reflected in the purchase price of the property in the form of a reduction.
Is an income approach suitable for your property? We would be happy to handle the valuation for you.
Photo: hayatikyhan