Income Approach vs. Sales Approach: How To Get The Best Deal

When on the market for investment properties, it’s important to understand the difference between Income Approach and Sales Approach. While some lenders may consider the income approach when lending on an investment property, others may only go off local and recent sales.

While both these approaches are different in their own ways, if you can find a happy median within a combination of the two, you’re sure to get the best deal. What I mean by this is the following: if your lender only goes off local and recent sales, and that is your only option of financing, then your best bet would be to find low income area that’s either desirable or liquid, to ensure a low sales comparison when determining value.
You must, of course, do your due diligence and gauge the demographic and what the current market rents go for, and weigh out pros vs. cons. Chances are, if you were to find a property like this in an area like that, then your income approach should be sufficient enough to consider the income approach as well, even though it may be irrelevant to that lender.

As all properties are not created equal — not all low-income areas will yield the same results or check the same boxes. Every property and location creates its own sets of pros, cons, challenges, etc., so it’s important to consider all the options.

Knowing how to properly vet each market comes with experience, but doing so properly will ultimately ensure that your path to great investment is met with as little error as possible. Mistakes in these investment strategies are often made but are avoidable, and when dealing with a lower class market, mistakes are cheap to learn from.

Depending on a person’s investment strategy and preference, a low-income targeted portfolio may not be the best option. For the buy & hold option, I find it to be quite a safe one.

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