Humber/Ontario Real Estate Course 2 Exam Practice

What is the primary function of the Income Approach when used in property valuation?

1. To estimate the replacement cost of the property.

2. To determine the price a property might command on the open market.

3. To assess the income-generating potential of the property.

4. To measure the depreciation rate of the property.

The correct answer is: To assess the income-generating potential of the property.

The primary function of the Income Approach in property valuation is to assess the income-generating potential of the property. This approach is commonly used for commercial properties and investment properties where the value is based on the income it can generate. By analyzing the property's rental income, operating expenses, and potential for future revenue, real estate professionals can determine the property's value based on its income-producing capabilities. This method is essential for investors looking to understand the return on investment a property can provide, making option C the correct choice. The other options are not the primary functions of the Income Approach. Estimating the replacement cost of the property (option A) is typically done through the Cost Approach. Determining the price a property might command on the open market (option B) is usually achieved through the Sales Comparison Approach. Measuring the depreciation rate of the property (option D) is not the primary aim of the Income Approach, as depreciation is considered in a different context when valuing a property.