PSI Virginia Real Estate Practice Exam

Which approach uses income generation to assess fair property value?

1. Sales Comparison Approach

2. Cost Approach

3. Income Analysis Approach

4. Adjusting Comparables

The correct answer is: Income Analysis Approach

The Income Analysis Approach is a method specifically used to evaluate the value of income-producing properties, such as rental houses, apartment buildings, or commercial properties. This approach is based on the premise that the value of a property is directly linked to its ability to generate income. By analyzing the expected rental income and expenses associated with the property, appraisers can determine the net operating income (NOI). From the NOI, various valuation techniques, such as capitalization rates, can be applied to convert future income into a present value. This approach recognizes that an investor will weigh the potential income derived from the property in determining what they are willing to pay for it. Therefore, it is particularly relevant for investors looking to assess properties based on their revenue-generating potential rather than just their physical attributes or replacement costs. In contrast, other approaches to property valuation, like the Sales Comparison and Cost Approaches, do not focus on income generation. The Sales Comparison Approach looks at comparable property sales to help gauge a property's market value, while the Cost Approach estimates the value based on the cost to replace or reproduce the property, taking into account depreciation. Adjusting Comparables refers to modifying data from similar properties to reflect differences that might affect their value, which also does not directly