An appraisal method used to estimate the current fair market value of a real property by attempting to determine the amount that an investor would be willing to pay for the right to receive the future income the property is projected to generate. In other words, the income approach involves estimating the future income of the property and applying a capitalization rate to that income to determine the market value. The capitalization rate is the rate of interest investors require as a return on their money before they would invest in the income producing property, taking into account all the risk involved in that particular enterprise.
Union Pacific Railroad Co. v. State Bd. of Equalization, 231 Cal. App. 3d 983 (1991):
“The income approach estimates current fair market value of a property by attempting to determine the amount that an investor would be willing to pay for the right to receive the future income the property is projected to produce. It is frequently summarized by the formula V = I/R, where V is the estimated value of the property, I is the projected future income, and R is a capitalization rate by which the present value of the income stream is determined.”
Jefferson County Bd. of County Com’rs v. S.T. Spango Greenhouses, Inc., 155 P.3d 442 (Colo. App. 2006):
“The three approaches to appraisal, used to determine actual market value, are the market approach, the income approach, and the cost approach. The market approach, or comparable sales method, analyzes the sales of comparable properties in the market. The income approach generally involves a calculation of the income stream the property is capable of generating, capitalized to value at a rate typical within the relevant market. The cost approach involves adding the estimated value of the land to the current cost of constructing a reproduction or replacement for the improvements and then subtracting the amount of depreciation.”