
Valuation methods at a glance: The income approach
In the income approach, the market value of a property is derived from the rental income. This method is therefore used for rented residential and commercial properties. These include apartment buildings, office and commercial buildings, shopping centers, parking garages, and logistics facilities.
First, the land value and the value of the buildings are calculated separately. The starting point for determining the building value is the rental income, minus the costs for administration, maintenance, and possible rental losses that the owner has to bear. These two factors, the value of the land and the amount of rental income, are used to calculate the final total income value.
A distinction is made between the so-called full income approach and the simple income approach. In the latter, the land value and the resulting land value interest are not taken into account. Only the value of the property built on it plays a role in determining the market value.
In contrast, the full income approach includes the interest on the land value in the calculation. Based on a comparative value method, local expert committees use the property interest rate for this purpose.
While the value of the land is subject to fluctuations, the value of the building tends to decline steadily due to age and wear and tear. If investments in a building are not consistent and comprehensive, the achievable rent will inevitably decrease.
As with the comparative and asset value methods, certain circumstances and conditions can also reduce or increase the market value when using the income approach. The asking price for a newly renovated apartment building with the prospect of high rental income is therefore not comparable to a property whose roof truss needs to be replaced.
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