Appraisal Income Approach
The following sections will cover the Income Approach and other income related methods used by real estate appraisers. Using the Income Approach, the appraiser estimates what a prudent investor would pay for the subject property based on the income the property produces. Today, any computer can do all the math calculations for you which greatly simplifies the process, unlike many years ago. However, as always, the appraiser MUST use their own training, experience, and judgment when determining what numbers and amounts need to be plugged into the calculations. There is an additional example of the Income Approach method in the sample Multi-Family appraisal report included in this book. Please review that sample appraisal.
You also need to review section HUD and FHA Guidelines and section Real Estate Appraiser Guidelines for more details and rules about appraisal standards and how to fill out the standard appraisal report forms.
Appraisal Income Approach is more effective in appraising income producing properties in which the typical buyer would be an investor who will rent out the property.
Appraisal Income Approach uses the potential income generated by the property to estimate the market value of the subject property. Appraisal Income Approach is based on the assumption that a typically informed buyer would estimate the value of a property based upon the anticipated future benefits of purchasing it. Future benefits could be in dollar amounts or in amenities of ownership. Appraisal Income Approach is more effective in appraising income producing properties in which the typical buyer would be an investor who will rent out the property. The anticipated future income is discounted to what the present value is worth today. For example, a dollar earned by someone today is worth more money than a dollar earned five years from now. The reason for this is inflation which is the cause of rising prices over the years. Also, if you have a dollar today you can invest it or put it in the bank to earn interest. Therefore, in five years you can end up with much more money than the original dollar you started with. Whether you're talking about one dollar or a million dollars, the concept is the same.
Appraisal Income Approach is not very effective for appraising a single family house or condominium. The reason for this is that single family homes and condos are generally not purchased based on the net rental income that they earn. Single family houses and condos tend to be purchased as a residence for the owner, as opposed to being purchased by an investor to rent out.