ENMETHODOLOGY · INCOME
Income approach: from rent to value
Gross rent is not net income, and gross yield is not a valuation method. The income approach begins with NOI.
From market rent to NOI
Start with sustainable market rent, deduct vacancy and credit loss, then deduct property-level operating expenses. Financing costs and income tax do not belong in property NOI.
- Effective gross income = rent × 12 × (1 − vacancy)
- NOI = effective gross income − operating expenses
Direct capitalization
Value = NOI / cap rate. The cap rate should come from relevant market evidence and reflect risk, growth and income quality. A small change can materially alter the result.
When DCF is appropriate
When cash flows change materially over time, DCF models leases, voids, capital expenditure, exit value and discount rates by period. Complexity does not repair unsupported assumptions.
Sources and further reading
Curated primary standards, official guidance and foundational research. Source register reviewed 31 August 2026.
- RICS — RICS Valuation — Global Standards (Red Book) (2025)Global standards covering bases of value, approaches, methods, models and reporting requirements.
- RICS — Discounted cash flow valuation (2023)Proper use and reporting of DCF, with model selection driven by purpose and evidence.
- IAAO — Standard on Mass Appraisal of Real Property (2023)Model specification, calibration, data quality and out-of-sample testing for mass appraisal.