Which approach to property value determines value based on potential income generation?

The Income Approach is a method of valuing property based on its potential to generate income. This approach is particularly relevant for investment properties, such as rental apartments, commercial buildings, and other income-generating assets. Under this approach, the property value is determined by estimating the future income it can produce, considering factors such as rental rates, occupancy levels, and operating expenses.

The process typically involves calculating the net operating income (NOI), which is the income remaining after all operating expenses are deducted from gross income. This NOI is then capitalized using an appropriate capitalization rate to derive the property’s value. By focusing on the expected financial performance of the property, the Income Approach provides a reliable estimate of value that reflects the actual market demand for income-producing properties.

In contrast, the Sales Comparison Approach relies on comparing similar properties that have recently sold to estimate value, while the Cost Approach focuses on the cost of constructing a similar property, subtracting depreciation. The Market Approach, while somewhat similar to the Sales Comparison Approach, may also consider broader market trends and analyses rather than just direct comparisons of recently sold properties.