What is the structure of a net income model?

A net income model is a method used in real estate valuation which focuses on the income generated by a property, allowing investors or appraisers to estimate its value based on the income it produces. In this context, the structure of the model can be represented by the formula that expresses property value in relation to net operating income (NOI) and a specified overall capitalization rate (OAR).

The formula V = NOI/OAR indicates that the property value (V) is derived by dividing net operating income (NOI) by the overall cap rate (OAR). This means that as the income of the property increases, or if the capitalization rate decreases, the overall value of the property will increase accordingly. It effectively captures the relationship between income generation and property valuation, making it a fundamental model in real estate finance and investment analysis.

The other formulas listed are relevant to different contexts within real estate valuation. For instance, value calculated as gross income multiplied by the gross income multiplier relates to total income rather than net operating income, while rent multiplied by a gross rent multiplier also reflects property valuation based on gross rental income. Meanwhile, value expressed as net operating income minus depreciation pertains to a profit approach but does not fit within the standard net income valuation framework.