Florida Real Estate Broker ExaminationReal Estate Finance and InvestmentMedium
A Florida real estate broker is advising a client on investment property valuation. The client asks about the income approach, specifically how it differs from the cost approach and sales comparison approach. The broker explains that the income approach is most suitable for which type of property?
- AUnique historic properties with no recent sales
- BVacant land parcels
- CNewly constructed single-family homes
- DIncome-producing commercial properties
Show answer & explanationAnswer & explanation
Correct answer: D. Income-producing commercial properties
The income approach is particularly effective for properties that generate rental income, as it values the property based on its anticipated future income stream.
Why the other options are wrong
- A. Unique historic properties might use a modified cost approach or a more subjective valuation, not primarily income.
- B. Vacant land is typically valued using the sales comparison approach, focusing on comparable land sales.
- C. Newly constructed single-family homes are typically valued using the cost approach or sales comparison approach.
Income Approach to Valuation
An appraisal method that estimates the value of income-producing property by converting its anticipated net income into a present value.
- Relies on Net Operating Income (NOI) and capitalization rate.
- Most suitable for commercial and investment properties.
- Often uses direct capitalization or discounted cash flow (DCF).
Memory trick: Valuation methods: Compare, Build, or Earn.