What is the formula for calculating value using the income approach?

The income approach to valuing real property is primarily concerned with the property's ability to generate income. This method is especially useful for investment properties, where the income produced directly impacts the property's overall value.

The correct formula, which is represented by the chosen answer, shows that the value of the property is determined by dividing the net operating income (NOI) by the capitalization rate (cap rate). Net operating income is the revenue generated by the property after deducting all operating expenses, but before mortgage payments and taxes. The capitalization rate is a measure of the expected return on investment, expressed as a percentage.

When you divide the net operating income by the cap rate, you arrive at the present value of future income, thereby quantifying what the property is worth based on its earning potential. This relationship illustrates how investors assess properties: the higher the NOI relative to the cap rate, the higher the value of the property.

Other options do not correctly express the income approach to valuation. Some may provide an incomplete picture of the valuation process (like the total rental income minus operating costs) while others refer to concepts and calculations that are not directly related to income valuation, such as purchase price adding improvements. Understanding this formula is essential for anyone studying or working