The third generally accepted approach to value is the income approach. The principle of anticipation is at work with this approach to value. In other words, the value of the property is based upon the present value of future benefits of property ownership. Most buyers do not purchase a property knowing or believing they are going to lose money when they eventually sell it.
The basis of the income approach is the relationship between the income that a property is capable of producing and the overall value of the property. If a given property produces more income than another similar property, the one producing more income is deemed to have more value. For non-residential properties, a capitalization methodology is employed using a market-derived income stream and the IRV formula (Income / Rate = Value) to formulate an indicated value by the income approach.
For residential properties, a gross rent multiplier is extracted from the market along with a typical rental amount for the property. A simple multiplication calculation will produce an indication of value by the income approach. The VIM formula (Value = Income x Multiplier) is generally used when performing the income approach for residential properties.