The income approach values property based on the income it produces (or could produce) as a rental. It's primarily used for commercial properties, apartment buildings, and residential rentals.
The basic concept: A property's value equals its net operating income divided by a capitalization rate. If a property generates $50,000 net income and the cap rate is 5%, the value is $1,000,000.
For rental properties, the income approach often produces different results than the sales comparison approach. Savvy investors know to check both methods when protesting.
If you own rental property, the income approach can be a powerful protest tool. Appraisal districts often default to sales comparisons, which may overvalue properties with below-market rents, high vacancies, or significant expenses.
To use this approach effectively, document your actual income and expenses:
• Lease agreements showing rental rates
• Vacancy history
• Operating expenses (maintenance, insurance, management)
• Capital expenditure needs
The income approach is especially effective when market rents don't support the assessed value implied by comparable sales.
You own a rental property generating:
Gross rental income: $36,000/year
Vacancy allowance (5%): -$1,800
Operating expenses: -$8,000
Net Operating Income: $26,200
Using a 6% capitalization rate:
Income approach value: $26,200 ÷ 0.06 = $436,667
If the appraisal district assessed your property at $500,000 using sales comparisons, you could argue the income approach supports a lower value based on actual rental performance.
Generally no. The income approach applies to income-producing properties. Your primary residence isn't generating rental income, so sales comparison is the standard method. However, if you rent part of your home, income approach may partially apply.
The cap rate represents the expected return on a property investment. It varies by property type, location, and market conditions. Lower cap rates mean higher values; higher cap rates mean lower values. Local market data determines appropriate cap rates.
Yes, for income-producing properties. Be prepared to provide documentation: rent rolls, expense statements, and comparable rental data. The district may counter with different income assumptions or cap rates.