What basic equation is used in the income approach?

In the context of the income approach to valuation, the correct basic equation is I/R = V. This formula illustrates the relationship between income (I), the capitalization rate (R), and value (V) of an income-producing property.

In this equation, income refers to the net operating income (NOI) generated by the property, and the capitalization rate reflects the return expected by an investor on that property. By rearranging the equation, you can derive the property's value based on either its income or the capitalization rate.

This equation is fundamental in real estate appraisal, particularly in determining how much an investor might be willing to pay for a property based on its income-generating potential. If an investor knows both the expected income and the desired rate of return, they can effectively calculate the value of the property. Therefore, this formula serves as a vital tool for appraisers and investors alike when they are assessing property values through the income approach.