Explanations

When an appraiser uses the income approach (also known as the capitalization method or investor’s method), they determine a property’s value based on its ability to generate future income. To accurately do this, the appraiser must analyze several characteristics of the income:

• Quantity: This refers to the actual amount of rent collected or the potential rent the property could generate. Appraisers estimate potential gross income, subtract a vacancy factor and bad debt, and then account for operating expenses to arrive at net operating income (NOI).
• Quality: This relates to the reliability and stability of the income, often tied to the creditworthiness of the tenants. High-quality income comes from tenants with strong credit ratings, which makes future payments more secure.
• Durability: This refers to the length and stability of the lease agreements. A long-term lease, such as a five-year agreement, is considered more durable than a month-to-month tenancy, providing greater certainty of future income

All these factors—quantity, quality, and durability—are crucial for an appraiser to establish the net operating income, which is then capitalized to determine the property’s value.

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