Using the income approach, what is the value of a property that generates an income of $52,000 with a capitalization rate of 12%?

To determine the value of a property using the income approach, the income generated by the property and the capitalization rate are essential inputs. The formula used in this approach is:

Property Value = Annual Income / Capitalization Rate

In this scenario, the property generates an income of $52,000 with a capitalization rate of 12%. By applying these values to the formula:

Property Value = $52,000 / 0.12

Calculating this gives:

Property Value = $433,333.33

Rounding to the nearest whole number, we arrive at approximately $433,333. This illustrates how the application of the income approach allows appraisers to estimate property value based on its capability to generate income, making it particularly useful for investment properties. This method emphasizes both the income potential and the risk involved, as reflected in the capitalization rate.

Understanding this principle helps in accurately valuing properties, particularly in commercial real estate where income generation is a critical factor.