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Real Estate · Valuation and Market Analysis

Which appraisal approach is most appropriate for valuing an income-producing property such as an apartment building?

Reviewed by Jordan Morley, Editorial Lead at 247SimpleTests. Written by the 247SimpleTests Editorial Team from the official source material cited on every question.

Correct answer

The income (capitalization) approach, which estimates value based on the net operating income the property produces

  1. A The sales comparison approach only
  2. B The cost approach
  3. C The income (capitalization) approach, which estimates value based on the net operating income the property produces
  4. D None of the approaches apply to rentals

Why this is the answer

The income approach (income capitalization) is the primary method for valuing income-producing real estate like apartment buildings, office buildings, or shopping centers. The appraiser estimates the property's net operating income (income after operating expenses but before debt service) and divides it by a capitalization rate to arrive at value (Value = NOI / Cap Rate). The sales comparison approach is most relevant for residential homes, and the cost approach is most useful for new, special-purpose, or unique properties where comparable sales are scarce. A competent appraisal often considers all three approaches and reconciles them, but the income approach carries the most weight for investment property.
Source: Real Estate Principles, Valuation Approaches

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About this topic: Valuation and Market Analysis

Three approaches: sales comparison (best for residential), cost (best for unique buildings), and income (best for investment property). Skilled appraisers reconcile all three. This is one of 6 Salesperson (National) questions on valuation and market analysis, each with a full explanation on a single study page.

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