As suggested by the name, the Income Approach determines property price using the amount of income the property produces less the expenses incurred on an annual basis. There are several variations of the Income Approach, however for the purposes of the real estate market in San Juan del Sur and the Emerald Coast it makes the sense to keep it simple. Here’s how:
- Estimate the annual operating expenses on the property (this should include all expenses - everything from power and water bills to property management expenses and annual property taxes).
- Estimate the annual gross income on the property (annual gross income on the property should include all sources of income on the property).
- Calculate the net operating income of the property by subtracting the annual operating expenses from the annual gross income.
- Estimate the capitalization rate by dividing the net operating income by the original purchase price that you paid for the property.
Back in 2005 when we first got into the real estate business in Nicaragua, this method was not an appraisal option that would have worked in San Juan del Sur because there were so few turnkey properties on the market for rent, and even less available for sale.
Then, most houses and condos were sold pre-construction. We could look to hotel rental rates for estimates to project rental income for clients on a seasonal basis, but those projections were a guess at best.
Today, while it's becoming possible to evaluate property using the Income Approach, your average local realtor may not know the “Capitalization Rate” (rate of return) on commercial properties on the market in your target area. This is because it's still difficult, if not impossible in some cases, to determine the actual income vs expense for properties in the region, as a result of poor or nonexistent record keeping, widely fluctuating expenses such as for water and power, or simply the misrepresentation of information in the marketplace.