Income value

Income Approach - The income approach is a standardized valuation method that determines the value of a property based on the sustainable income it can generate (rental income). It is primarily used for rented residential and commercial properties and, alongside the cost approach and the sales comparison approach, is one of the three legally regulated methods under the Real Estate Valuation Ordinance (ImmoWertV).

Calculation of the Income Approach Value

The income approach breaks down the property value into two components: the land value and the building income value. The land value is derived from the standard land value multiplied by the lot area and is determined separately, as land is considered non-depreciable and is not subject to depreciation due to age.

The building income value is derived from the gross income (sustainably achievable annual rent), from which the operating costs (administration, maintenance, risk of rent loss) are deducted to determine the net income. The return on land value (land value multiplied by the property interest rate) is deducted from the net income. The remaining amount-the net building income-is multiplied by a multiplier derived from the property interest rate and the building’s remaining economic useful life.

The formula simplified: Capital value = Land value + (Net building income × Multiplier)

Of particular importance is the property interest rate, which is derived by local appraisal committees from actual purchase prices. It reflects the market-standard expected return for a specific type of property and location and typically ranges between 2 and 4 percent for residential properties and between 5 and 8 percent for commercial properties.

Areas of Application

The income approach is the preferred method for income-generating properties, where value is primarily determined by the achievable rental income. Typical applications include apartment buildings, office and commercial buildings, retail spaces, mixed-use properties, and commercial properties.

For owner-occupied single-family homes and condominiums, however, the comparable sales method (provided there are a sufficient number of comparable properties) or the asset value method is generally used, as the achievable rents are less indicative of the actual market value in these cases.

In the context of tax valuation-such as for inheritance and gift tax-the Valuation Act (BewG) also prescribes the income approach for rented properties, albeit using a simplified calculation method.

Income Approach Calculation - Example: Multi-family Home in Nuremberg-Maxfeld

Item	Amount	Explanation
Gross income (annual net rent)	€36,000/year	6 units × 60 m² × €10/m²
Management costs	- €5,400	15% of gross income (administration, maintenance, risk of rent loss)
Net income	€30,600/year	-
Land value	€180,000	600 m² × €300/m² standard land value
Return on land value (3.0% property interest rate)	- €5,400/year	€180,000 × 3.0%
Net building income	€25,200/year	-
Multiplier (30-year RND, 3.0% property interest rate)	× 19.60	From ImmoWertV multiplier table
Building income value	€493,920	€25,200 × 19.60
Total income value	€673,920	Building income value + land value

Note: Real estate interest rates are published by the Nuremberg Appraisal Committee in the Real Estate Market Report.

Income Value and Multiplier: Practical Relevance for Investors

In addition to the formally standardized calculation according to ImmoWertV, real estate investors frequently use the so-called purchase price multiplier (also known as the annual rent factor) in practice as a simplified equivalent to the income value. It indicates how many times the annual net rent the purchase price amounts to. A multiplier of 20 corresponds to a property yield of approximately 5%, while a multiplier of 30 corresponds to approximately 3.3%.

In the Nuremberg metropolitan region, multipliers ranging from 20 to 30 have been achieved in recent years for multi-family homes in prime locations-depending on location, condition, and rent levels. As interest rates have risen, these multiples have tended to decline because investors expect higher returns.

Practical Tip for Property Owners in Nuremberg and Franconia

In the Nuremberg metropolitan region, the Appraisal Committee for Property Values regularly publishes the current property yield rates in its real estate market report. These values are essential for a realistic income approach valuation, as blanket assumptions can lead to significant misvaluations.

We recommend that owners of rental properties have the income value of their property reviewed regularly-especially before a planned sale, when planning for inheritance, or when financing adjustments are pending. A professional valuation provides transparency regarding the actual market value and strengthens your negotiating position with buyers and banks.

Frequently Asked Questions

What is the difference between capitalized income value and market value?

The income value is the result of a specific valuation method, while the market value is the estimated price that can be achieved on the open market. The market value can be derived from a single method or determined as a synthesis of several methods (income value, asset value, comparative value) while taking all circumstances into account. For rented properties, the income value is often close to the market value.

What operating costs are included in the income approach?

Operating costs include administrative costs, maintenance costs, and the risk of rent loss. The amount is based on the flat-rate rates specified in the ImmoWertV or on actual, market-standard empirical values. For residential properties, the risk of rent loss is typically 2 percent of gross income. Operating costs that cannot be passed on to tenants are also included in the management costs.

How does the property interest rate influence the income value?

The property interest rate has a significant impact on the income value: the lower the interest rate, the higher the multiplier and thus the income value. A difference of just 0.5 percentage points can lead to value discrepancies of several hundred thousand euros for larger properties. Therefore, using the correct, locally customary property interest rate is crucial for a valid valuation.

When should I, as a property owner, commission a capitalized income valuation?

A professional capitalized income valuation is advisable before selling a multi-family home or commercial property, in matters involving inheritance or gift taxes, in divorce settlements, and when banks need to verify the mortgage lending value. We can connect you with qualified experts from the Appraisal Committee network of the Nuremberg Metropolitan Region.

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