Hawaii Pre-Licensing National Practice Exam

Which statement about the income approach to value is correct?

1. It evaluates value according to property depreciation.

2. It estimates value based on historical sales data.

3. It determines an investment property's value based on its return.

4. It assesses value relative to similar properties in the area.

The correct answer is: It determines an investment property's value based on its return.

The income approach to value is a method primarily used in the appraisal of investment properties, emphasizing the income that the property is expected to generate. This approach focuses on the potential future financial return that an investor can derive from the property, such as rental income or other revenue streams. By capitalizing the net income—taking into account operating expenses and vacancy rates—appraisers can estimate the property's value based on its income-producing capabilities. This method stands apart from evaluating property depreciation, which is more concerned with the physical condition of the property over time, as well as from estimating value based solely on historical sales data or comparing it to similar properties. While those methods are valuable in their own contexts, the income approach specifically analyzes the property's financial performance, making it the correct method for determining value in relation to an investment’s expected returns.