If you are involved in MLM marketing, or any internet marketing for that matter, then you have probably heard of what is called an Income Capitalization Approach (also known as the COA). However, do you really know what it is? In this short article, we’ll take a look at what is it, why it’s important, and how you can use it to boost your own bottom line. Curious to know more? Great… continue reading below!
What is it? Essentially, an income capitalization approach is a way of looking at the way you determine your Net Operating Income or “OCI” for that year. The method basically divides your revenue by the amount of costs you incur for your business each month. For example, if you cost $500 a month to run your website, that’s your “Net Operating Income” for the month.
Now, there are two ways you can use this methodology…the direct and the indirect method. If you want to determine your true “OCI,” all you need to do is determine how much your real estate investment is worth. This can be done with the help of someone like appraiser, or with something as simple as using the real estate appraisal software provided by some realtors. Here, we’ll take a look at the indirect method.
There are two reasons why real estate investors prefer the income capitalization approach over the other two valuation methods. First, with the indirect valuation methods, you can calculate your profit much easier since you don’t have to deal with the hassle of dealing with the direct problem of selling the property. It’s just an equation, right? Once you plug in the figures for the property and the market trend, you get the exact figure that you want to know, your ROI.
Second, with the income capitalization approach, there is no worry about dealing with the issue of “expects.” Appraisers, who use the indirect method, must make assumptions regarding the price, timing, and strategy used by the seller in purchasing the property. If the estimated costs and profits of similar properties in the same neighborhood are not provided, or if the local market has changed, these assumptions can cause problems in the calculations. On the other hand, when you use the comparable sales approach, you only need to estimate the price of a single similar property and don’t have to make any assumptions.
When you make the decision to buy an income-producing property, there are many reasons to consider the income capitalization approach. First, it helps you avoid emotional issues that could easily come about. It’s easy to be seduced by the attractive offers and the lower prices that many property sellers provide. You may fall for the “get rich schemes” promoted by unscrupulous sellers, who may take advantage of your lack of knowledge about the market. On the other hand, underpricing the property and underselling the property’s value can cause you to miss the opportunity to make significant cash. It is important to understand the risks and rewards involved in any investment and to stay motivated.
One of the major reasons why buyers choose the income capitalization approach is because they assume that the property will appreciate in value as long as it is occupied by its owner. This assumption may be reasonable given the current state of the real estate market. However, this assumption is often made to arrive at the fair market value of the property. Market conditions may change rapidly in the future, which may result in a depreciation that is larger than what is expected. If the market changes suddenly, investors may encounter unforeseen problems. Because of this possibility, an income capitalization approach that takes into account the possibility of substantial future losses is a more realistic way of setting a cap rate on the amount of income that you are willing to pay for a house.
Unfortunately, some real estate investors use the income capitalization approach without realizing the potential downside. In particular, investors fail to calculate the long-term effects of their investment decisions, especially if they make bad investment decisions. A properly constructed income capitalization approach ensures that your investment decisions are based on sound principles and do not risk the future of your real estate portfolio.