Net operating incomes and capitalization rates are necessary for which model in property assessment?

The Income Approach is fundamentally based on the premise that the value of a property is derived from its ability to generate income. This model is particularly applicable to income-producing properties, such as apartments, office buildings, and retail centers.

Net operating income (NOI) represents the actual income generated from the property after all operating expenses are deducted, making it a crucial figure in this approach. Capitalization rates are used to convert that income figure into an estimate of value. Specifically, the formula for determining property value using the Income Approach is to divide the net operating income by the capitalization rate. This method reflects the return on investment that an investor might expect and provides a way to appraise the property based on its revenue-generating potential.

In contrast, the Cost Approach focuses on the cost to replace or reproduce a property, relying less on income or capitalization rates. The Sales Comparison Approach assesses value based on the sales prices of comparable properties and does not typically consider income. The Market Value Approach is a broader term often associated with various techniques, including the Income and Sales Comparison approaches, but for the specification of NOI and capitalization rates, the Income Approach is the most accurate model.