Casa Academy

Reviewed by Casa Academy and updated July 29, 2026 using the current DBPR checklist and Pearson VUE scheduling guidance.

Income Approach

The income approach estimates investment property value by capitalizing net operating income or discounting future cash flows, reflecting what investors pay based on expected rental revenue rather than construction cost or recent comparable sales alone.

Exam context

Match income approach to NOI and cap rate or DCF questions. Sales comparison uses comps; cost approach uses replacement cost minus depreciation. Value = NOI / cap rate is the core formula.

Direct capitalization

Appraisers stabilize gross income, subtract vacancy and operating expenses to derive NOI, then divide by a market cap rate from comparable sales. Higher cap rates imply higher risk or lower growth expectations. The approach suits apartments, retail centers, and office buildings with income history.

When appraisers use it

Income approach dominates income-producing properties while owner-occupied homes rely on sales comparison. Cost approach may support new construction. Agents marketing investments should present realistic expense ratios because buyers underwrite value with the same income approach logic lenders use.

Examples

  • Cap rate application

    A strip center produces $120,000 NOI and market cap rates are 8%. Indicated value is $1,500,000 before adjusting for deferred maintenance or above-market leases.

  • Stabilized vs actual rent

    An appraiser capitalizes market rent at $20 per square foot even though current leases average $17, reflecting value to a buyer who can raise rents after lease-up.

Keep studying

Practice income approach questionsEnroll in pre-licensing

Related terms

Related resources

Sources