Feasibility & Appraisal
What is Income Approach?
A property valuation method that determines value based on the property's income-generating potential, typically using NOI and cap rate.
Understanding Income Approach
The income approach is one of three primary methods used to value real estate properties, particularly income-producing properties like glamping resorts, RV parks, and campgrounds. This approach values a property based on its ability to generate income.
The income approach typically uses the formula: Property Value = Net Operating Income (NOI) ÷ Capitalization Rate (Cap Rate). This method assumes that a property's value is directly related to its income potential.
For outdoor hospitality properties, the income approach is often the most relevant valuation method since these are income-producing assets. Appraisers analyze historical income, projected income, operating expenses, and market cap rates to determine value.
Sage Outdoor Advisory uses the income approach in our appraisals, along with sales comparison and cost approaches, to provide comprehensive property valuations.
The income approach typically uses the formula: Property Value = Net Operating Income (NOI) ÷ Capitalization Rate (Cap Rate). This method assumes that a property's value is directly related to its income potential.
For outdoor hospitality properties, the income approach is often the most relevant valuation method since these are income-producing assets. Appraisers analyze historical income, projected income, operating expenses, and market cap rates to determine value.
Sage Outdoor Advisory uses the income approach in our appraisals, along with sales comparison and cost approaches, to provide comprehensive property valuations.
Examples of Income Approach
- •An appraiser values a glamping resort using the income approach: The property generates $400K in stabilized NOI (after accounting for normal vacancy and operating expenses). Researching recent sales of comparable glamping properties reveals cap rates between 6.5% and 8%, with similar properties trading at 7% cap rate. Using income approach: Property value = NOI ÷ Cap rate = $400K ÷ 0.07 = $5.7M. The appraiser also considers the sales comparison approach ($5.4M) and cost approach ($6.1M), then reconciles to a final value of $5.7M, giving the income approach the most weight since this is an income-producing property. Lenders use this valuation to determine loan amounts and loan-to-value ratios.
- •An RV park appraisal using income approach: The 120-site property generates $750K annual revenue with $320K operating expenses, resulting in $430K NOI. Market research shows RV parks in this region trade at 7.5-8.5% cap rates, with premium resorts at lower rates. The appraiser selects an 8% cap rate based on property characteristics and comparable sales. Income approach valuation = $430K ÷ 0.08 = $5.375M. This valuation method is most appropriate for income-producing properties like RV parks, as it directly relates value to income-generating ability. The appraisal helps buyers understand fair market value and helps lenders assess collateral value for financing decisions.
- •A campground owner requests an appraisal before refinancing: The property shows $280K NOI from $650K revenue and $370K operating expenses. The appraiser researches cap rates from recent campground sales in the region, finding a range of 8.5-10% depending on location and amenities. Applying a 9% cap rate based on the property's characteristics, income approach indicates $3.11M value ($280K ÷ 0.09). However, the appraiser also notes potential NOI improvement opportunities (energy efficiency, rate optimization) that could increase value to $3.5M if implemented, providing both current and prospective value for the refinancing analysis.
Common Use Cases
- •Property appraisals
- •Investment analysis
- •Purchase decisions
- •Loan underwriting
Related Services
Frequently Asked Questions About Income Approach
When is the income approach used?
The income approach is most appropriate for income-producing properties like glamping resorts, RV parks, and campgrounds.
How does income approach differ from other valuation methods?
The income approach focuses on income potential, while sales comparison uses similar sales and cost approach uses replacement cost.
Need Help with Your Outdoor Hospitality Project?
Our experts can help you understand how income approach applies to your project.
Schedule Free Consultation