In the Income Approach, what is the formula used to calculate value?

In the Income Approach, the valuation method emphasizes the income-generating potential of a property. The correct formula used to calculate value in this approach is based on the Net Operating Income (NOI) and the Capitalization Rate.

The formula “Value = Net Operating Income (NOI) / Capitalization Rate” underscores the relationship between income and value by considering how much income the property generates and how it is perceived in terms of risk and return by investors. The NOI represents the operational earnings of the property after all operating expenses have been deducted from the gross rental income, giving a clear perspective of the actual income produced.

The Capitalization Rate reflects the expected rate of return on an investment property and is a crucial indicator of the risk associated with the investment. By dividing the NOI by the capitalization rate, investors can determine the value of the property based on its income-generating capabilities while taking into account the risk.

This method is essential for investors and property appraisers as it provides a straightforward way to assess the financial viability and comparative value of investment properties based on expected income, thus aligning with the principles of investment valuation.