Property Income Approach: How to Value Real Estate by Its Earnings

When you’re buying a rental property or evaluating a commercial building, price doesn’t tell the whole story. What matters is what it property income approach, a method of valuing real estate based on the income it generates. Also known as the income capitalization approach, it’s how smart investors skip guesswork and focus on real returns. This isn’t about how pretty the kitchen is or how new the roof looks. It’s about the rent coming in, the bills going out, and whether the numbers actually work.

The cap rate, the ratio of net operating income to property value, used to compare investment properties is the heartbeat of this method. If a building nets $60,000 a year in rent after expenses and sells for $1 million, its cap rate is 6%. That’s your baseline. Compare that to similar buildings in the area — if others are trading at 7%, this one’s overpriced. The cash on cash return, the annual pre-tax cash flow divided by the total cash invested tells you something even more personal: how much you actually pocket relative to the money you put down. A 10% cash on cash return means you’re making $10,000 a year on a $100,000 down payment. Simple. Direct. No fluff.

This approach doesn’t care about speculative bubbles or trendy neighborhoods. It cares about leases signed, tenants paying on time, and maintenance costs you can predict. That’s why it’s the go-to method for commercial properties — office buildings, retail strips, industrial warehouses — where income is the only real asset. Even for residential rentals, it cuts through noise. A 2BHK in Adelaide might look cheaper than one in NYC, but if the net income is the same, the better deal is the one with the higher cap rate. And yes, this method explains why some properties sit empty for months — the math just doesn’t add up.

You’ll find posts here that break down what a good ROI looks like for commercial property, how to calculate it without a finance degree, and why some investors ignore this method — and end up losing money. You’ll see real examples from Australia, Virginia, and beyond. No theory. No hype. Just the numbers that separate the investors who build wealth from those who just buy houses.