What is a common method used to estimate property value when employing the income approach?

The income approach is a valuation method primarily used for income-producing properties, such as rental apartments, commercial buildings, or investment properties. The common method within this approach is the capitalization of income, which focuses on determining the potential income a property can generate and converting that income into an estimated value.

The capitalization process involves two main steps: first, estimating the net operating income (NOI) of the property, which is the total income from rents minus operating expenses. Next, this NOI is divided by a capitalization rate (cap rate), which reflects the investor’s desired rate of return on their investment given the risks associated with that particular type of property.

Using this method allows appraisers and investors to assess the value of a property based on its ability to generate income, rather than its physical attributes or recent sales. It is especially useful in commercial real estate, where income potential is a significant factor in determining value.

In contrast, comparison of recent sales focuses on analyzing similar properties that have sold recently to determine a value based on the market. Cost of construction relates to the expenses incurred to build the property, which may not accurately reflect current market conditions or values. Market analysis encompasses a broader assessment that can include various factors affecting value, but it does not specifically target