In real estate appraisal, the Income (Capitalization) Approach is a method used to estimate the value of income producing property based on its ability to generate net income. This approach is commonly applied to rental and investment properties where income is a primary factor in value.
The process involves three main steps. First, the appraiser determines the property’s net annual income by subtracting operating expenses from gross income. Second, an appropriate capitalization rate is selected based on market conditions and risk. Third, the value of the property is calculated by dividing the net income by the capitalization rate, converting future income into a present value estimate.
