Investors purchase income-producing properties for the income (future benefits) the properties will yield (produce) Investor in real property should estimate the duration of the income stream and its risk, or likelihood of receipt
Do not apply this to
Special purpose property
Unique properties with a limited market appeal
People purchase income-producing property for the income it will return on their investment.
The income a property generates may come from many sources, such as:
Amenities like a laundry facility in an apartment building or a gym in an office building,
Roof rents from billboards, and
Ground rents from cell towers.
The value an investor can put on an income-generating property can be determined by the income approach. This is based on the present value of the rights to future income that is being purchased. In this approach income divided by rate equals value.
To do this:
– Estimate the annual potential gross income from all sources.
– Deduct for vacancies and collection losses (“bad debt”) to obtain the effective gross income.
– Deduct the annual operating expenses to obtain the net operating income
Please do not include
(1) Debt service (principal and interest payments)
(3) Capital expenditures/capital improvements
(4) The owner’s personal income tax liability
Divide the NOI by the CAP Rate to obtain an estimated value.
Again, investors purchase income-producing properties for the future benefits the properties will yield; it is the income the real estate generates, not income that the business generates.
Hence this will not apply to buyers of say gas stations, motels or hospitality properties, car washes, owner-user properties etc.