Income Method

What is Income Method?

Income approach is a evaluation methodology used for real estate estimated that is computed by dividing the capitalization tariff or price by the net operating income of the rental payments. Investors use this computation to value properties based on their profitability.

This methodology approaches national income from allocation facet. To put it in other words, this methodology quantifies national income at the stage of allocation and appears as income paid or received by individuals of the nation. Hence, under this methodology, national income is attained by adding up of the earnings of all individuals of a nation. Individuals earn by contributing their own services and the services of their property such as land and capital to the national production.

Hence, national income is computed by summing up the rent of a land, salaries of employees and wages, interest on capital, surplus profits of entrepreneurs (including unallocated corporate profits) and earnings of self-employed people. This methodology of evaluating national income has the great advantage of manifesting the allocating of national income among different earning groups such as :

  • Workers
  • Landlords
  • Entrepreneurs
  • Owners of capital

As mentioned earlier, the sum of final expenditures in the economy must be equivalent to the incomes received by all the factors of manufacturing taken together. This follows from the simple notion that the revenues earned by all the enterprises put together must be allocated among the factors of manufacturing as profits, salaries, interest earnings, wages and rents.

The above mentioned is the concept that is explained in detail about Income Method. To know more, stay tuned to BYJU’S.