Final answer:
In appraising a three-unit dwelling to analyze its income, the Income Approach is utilized, which includes estimating potential rental income, analyzing comparable properties, deducting expenses, and applying a capitalization rate to estimate property value.
Step-by-step explanation:
When appraising a three-unit dwelling and wanting to analyze its income for appraisal purposes, you would use the Income Approach. This method focuses on the revenue-generating potential of the property. It includes estimating the potential rental income, analyzing comparable properties, and accounting for expenses such as maintenance and property taxes. The appraiser would also consider the net operating income and apply a capitalization rate to estimate the property's value based on its income.
To determine the potential rental income, the appraiser might analyze current rent prices for similar units in the area, much like finding an average rent for a two-bedroom apartment by looking at classified ads. For instance, if several similar three-unit dwellings in the area are charging $1,200 per unit, the potential gross income could be estimated at $3,600 per month.
It's also important to consider expenses and vacancy rates which will reduce the effective gross income. After accounting for these, the resulting net operating income (NOI) is then capitalized using a cap rate derived from the market to estimate the property's current value.