Methods of Classifying and Valuing Your Properties

There are three methods to classify and value properties. One is the income approach. Another is the market approach and the last is the cost approach. 

An income approach uses a methodology to estimate the fair market value based upon income streams that your cash flow is earning from an asset and that is expected to generate. The idea is that the realistic valuation of any investment in an income producing asset is directly related to the future income attributable to it. There are two ways to apply the income approach to determine the fair value of assets. There's the discounted cash flow method and the direct capitalization method. The discounted cash flow method involves estimating future cash flow from an asset for a period of time and then discounting it into its present value. The direct capitalization method capitalizes net operating income based on projected revenues and operating costs. The net operating income is divided by the overall capitalization rate to estimate the fair value of the asset. 

Then there's the market approach. Under the market approach, the fair value of an asset reflects the price which comparable assets are purchased under similar circumstances.

 Lastly, the cost approach determines the value of an asset as an estimate of the current cost to reproduce or replace the asset less all applicable forms of incurred depreciation. The cost approach is based on the principle of substitution which states that an investor would pay no more for an asset than the amount necessary to reproduce or replace the asset.