Canadian Accredited Insurance Broker (CAIB) Two Practice Exam

When is the Income Approach method primarily used?

1. For newly constructed buildings

2. When a rundown building is making a profit

3. For residential properties only

4. When no income is generated by the property

The correct answer is: When a rundown building is making a profit

The Income Approach method is primarily used in instances where a property generates income, making option B the most applicable choice. This approach is particularly beneficial for investment properties, such as rental buildings or commercial real estate, where the value is determined based on the expected income it can generate. Investors are generally interested in the return on investment, and the Income Approach provides a clear way to assess the property's financial performance. In contrast, the other options do not accurately depict the application of this method. For newly constructed buildings, the cost approach might be more relevant since these properties have not yet established a consistent income stream. Residential properties can utilize various valuation methods, not just the Income Approach, which makes the option of "for residential properties only" overly restrictive. Finally, a property that does not generate any income would not benefit from the Income Approach, as the entire premise relies on the income that the property is capable of producing. Thus, focusing on properties that are profitable makes option B aligned with the purpose of the Income Approach.