For buyers of a rented property, the price per square metre is not what matters, but the income: What does the property generate year after year? That is precisely what the income approach answers—the official valuation method for income-producing properties under the Real Estate Valuation Ordinance (ImmoWertV). We explain step by step how the income value is determined, which key figures you need for this, and how the method differs from the familiar broker’s formula.
What is the income approach?
The income approach is one of the three legally standardised methods for determining the market value (market price) of a property—alongside the comparative value and cost approaches. It is governed by Sections 27 to 34 ImmoWertV and values a property not according to its construction costs, but according to the income it generates on a sustained basis.
The basic idea: An income-producing property is worth the sum of its future net income, discounted to today—plus the land value, which remains even after the building is no longer used. Since 2022, the ImmoWertV has recognised three variants: the general, simplified and periodic income approaches. In practice, the general approach predominates, considering the land and building separately.
When is the income approach used?
The method is applied wherever the return determines the value:
- Apartment buildings and rental residential buildings
- Residential and commercial buildings
- Rented condominiums as capital investments
- Commercial, office and retail properties
For an owner-occupied condominium or single-family home, on the other hand, the comparative value or cost approach is usually more appropriate, because the focus here is not rental income but utility value.
The components of the calculation
The income value consists of several quantities that build on one another:
- Gross income: the annual net cold rent that can be achieved at market rates, i.e. all rental income excluding allocable operating costs (Section 31 ImmoWertV). The decisive factor is the sustainably achievable rent, not a temporarily excessive rental agreement.
- Operating costs: the regular costs that cannot be passed on to tenants. Section 32 ImmoWertV names four items: management costs, maintenance costs, rent loss risk and non-apportionable operating costs.
- Net income: gross income minus management costs. It reflects the actual earning power of the property.
- Land value interest: the portion of net income mathematically attributable to the land. It is calculated as land value × property interest rate and deducted from net income so that only the building component is capitalized.
- Property interest rate: the interest rate at which properties of a certain type are remunerated on average in line with market practice (§ 21 ImmoWertV). Local expert committees derive it from actual purchase prices and publish it in their land market reports.
- Multiplier (present value factor): the factor used to capitalize the net income of the building structure. It depends on the property interest rate and the building’s remaining useful life (§ 34 ImmoWertV). The longer the remaining useful life and the lower the interest rate, the higher the multiplier—and therefore the value.
The property interest rate is the most sensitive variable. As a rough guideline, around 2.5 percent applies in 2026 to detached and semi-detached houses, approximately 3.0 percent to condominiums and 4.0 to 4.5 percent to apartment buildings; in sought-after metropolitan locations it is lower, while in rural regions it is higher. The values determined by the responsible expert committee are always binding.
Calculation example: income value of an apartment building
A simplified example based on the general income approach illustrates the interaction:
- Annual gross income (net cold rent): 48,000 euros
- Management costs (around 20 percent): 9,600 euros
- Net income: 38,400 euros
- Land value (500 m² × 600 euros land reference value): 300,000 euros
- Property interest rate: 4.0 percent
- Land value interest (300,000 × 4.0%): 12,000 euros
- Building’s share of net income (38,400 − 12,000): 26,400 euros
- Remaining useful life: 50 years
- Multiplier at 4.0% and 50 years: approximately 21.48
The capitalized building income therefore amounts to 26,400 × 21.48 = approximately 567,000 euros. Together with the land value of 300,000 euros, this results in an income value of approximately 867,000 euros. A complete valuation would also include special property-specific Add features such as a maintenance backlog or unusual contractual arrangements.
Income capitalization approach or broker’s formula – what is the difference?
Many owners are familiar with the quick broker’s formula: purchase price = annual net cold rent × factor (also called the purchase price factor, multiplier, or rent price multiple). With a factor of 18, our example house would come to 48,000 × 18 = 864,000 euros – remarkably close to the official result.
The crucial difference lies not in the result, but in the traceability. The rule of thumb compresses all assumptions into a single figure while ignoring operating costs, the separation of land and building, and the remaining useful life. A factor chosen incorrectly by just a few points dramatically changes the value: a factor of 15 would result in 720,000 euros, while a factor of 22 would already result in 1,056,000 euros. The official income capitalization approach, by contrast, makes every assumption visible and is therefore reliable – in court, with the bank, and at the tax office.
In short: The broker’s formula is suitable for an initial rough assessment, while the income capitalization approach is suitable for a well-founded valuation.
Advantages and disadvantages for owners
- Advantage – Market proximity: The approach reflects what capital investors are actually interested in: sustainable income.
- Advantage – Traceability: Every key figure is documented and legally safeguarded by the ImmoWertV.
- Advantage – Basis for negotiations: A properly derived income value protects against an offer price that is too low.
- Disadvantage – Data requirements: You need reliable rent information, the standard land value, and the capitalization rate determined by the local valuation committee.
- Disadvantage – Interest-rate sensitivity: Small changes in the capitalization rate or remaining useful life significantly affect the value.
- Disadvantage – Not automatic: A legally sound valuation report requires expertise; the formula alone does not replace an appraiser.
FAQ on the income capitalization approach
Which properties is the income capitalization approach suitable for?
For all properties whose value is derived from rental income – especially apartment buildings, residential and commercial buildings, and rented condominiums. For owner-occupied properties, the comparative or cost approach is usually more suitable.
Where can I obtain the capitalization rate?
From the local valuation committee for property values in your city or district. It regularly publishes the customary market rates in the property market report. Alternatively, the ImmoWertV specifies standardized reference values.
What is the difference between gross income and net income?
Gross income is the total annual net cold rent that can typically be achieved on the market. Deduct the operating costs from this and you obtain the net income—the basis for the actual valuation.
How does the remaining useful life affect the valuation?
Together with the property interest rate, it determines the multiplier. The longer a building can still be used economically, the higher the multiplier and therefore the income value. Modernizations can extend the remaining useful life.
Does the income approach replace an appraisal?
No. You can roughly determine the income value yourself, but a legally valid market value appraisal—for example, for inheritance, divorce, or the tax office—can only be prepared by a qualified expert.
Conclusion: The value lies in the income
The income approach translates a property's rental income into a reliable market value. Anyone who properly applies gross income, operating costs, property interest rate, and remaining useful life obtains a result that is clearly superior to the quick broker formula in terms of accuracy and traceability. The rule of thumb is sufficient for an initial orientation—but when it comes to buying, selling, or securing financing, there is no way around the official procedure under the ImmoWertV.