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Simple English definitions for legal terms
income approach
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A quick definition of income approach:
The income approach is a way to figure out how much a property is worth by looking at how much money it can make. This method is based on the idea that the more money a property can make, the more it is worth. This is different from the market approach, which looks at how much similar properties are selling for, and the cost approach, which looks at how much it would cost to build the property from scratch.
A more thorough explanation:
The income approach is a method used to evaluate the value of a property based on the income it is expected to generate. This approach is commonly used by real estate appraisers and investors to determine the potential return on investment.
For example, if an apartment building generates $100,000 in annual rental income, an appraiser may use the income approach to determine the property's value. The appraiser would consider factors such as the vacancy rate, operating expenses, and potential rental income to estimate the property's future income stream. Based on this analysis, the appraiser would then determine the property's value using a capitalization rate.
The income approach is often used for commercial properties, such as office buildings, shopping centers, and industrial warehouses. It is also used for rental properties, such as apartments and single-family homes.