Buying a a property is like buying a business. Nobody wants to pay too much for a business that generates only so much profits. Similarly, we need to think rationally about a property from an income approach, just like how the bankers think about a business.

You may ask: what if I'm buying one for my own use? The answer is: you should treat the home you're buying like an investment property equally. The key idea here is you want to find out the fundamental value of a home. And history tells us that all properties and assets go back to its fundamental value sooner or later. That means, relying only on speculative values set forth by people in real estate market can cost you big discount of your net worth later when property values really adjusts. Unless you have couple million dollars sitting in your bank account, the chances are, you care about your net worth. The bottomline is you don't want to pay too much for what a property is really worth fundamentally.

Owning a property gets you a series of rental income. So the income approach actually makes you think backward: For the rental income that you're getting regularly, how much would you want to pay for it? Savvy investors and bankers know that we can employ the so-called Discounted Cash Flow (DCF) method. We're not going to take 10 pages to discuss it. But the key point here is, you want to compare the fundamental value (we call it Rent-Implied Home Value) with the selling price out there to determine if it's a bargain or not.