Which of the following appraisal methods involves capitalizing net operating income?

The method that involves capitalizing net operating income is the income approach. This approach is utilized primarily for income-producing properties, such as rental properties or commercial real estate. The fundamental principle behind the income approach is that the value of a property is directly related to the income it generates.

In this approach, appraisers estimate the net operating income (NOI) of a property, which is the total income from the property minus all operating expenses. They then capitalize this income by applying an appropriate capitalization rate to determine the property's value. This capitalization rate is typically derived from comparable market data and reflects the return on investment that investors expect for similar properties.

In contrast, while direct capitalization is closely related to the income approach, it primarily refers to the specific method of capitalizing the NOI in a straightforward manner using a cap rate. The cost approach focuses on estimating value based on the cost to reproduce or replace the property minus depreciation, and the sales comparison method derives value by comparing similar properties that have recently sold in the area. Therefore, the income approach explicitly involves the process of capitalizing net operating income, making it the correct choice.