Which method is used in the "income approach" to determine property value?

The income approach is a method that focuses on estimating the potential income a property can generate and capitalizing that income to determine its value. This approach is particularly relevant for investment properties, such as rental units, commercial buildings, or any property where income generation is a significant factor in its market value.

In applying this method, an assessor analyzes the expected net operating income that the property is expected to produce over time. This income is then converted into a present value using a capitalization rate, which reflects the risk and return expectations of investors in the market. The resulting figure represents the value of the property based on its ability to generate income, rather than on comparable sales or replacement costs.

This contrasts with other valuation methods, such as the sales comparison approach, which looks at similar properties to derive value, or the cost approach, which involves estimating the cost to replace the property. Therefore, the income approach is distinct in its focus on the financial performance of the property itself.