What method estimates the value of a property by applying a rate of return to its net income?

The income capitalization approach is focused on estimating the value of a property based on its ability to generate income. This method involves taking the net operating income (NOI) of the property and applying a capitalization rate, which represents the expected rate of return for investors in that market. The result provides an estimate of the property’s market value.

This approach is particularly applicable for investment properties, such as apartment buildings or commercial real estate, where income generation is a primary consideration for potential buyers. By quantifying the relationship between income and investment return, this method helps investors make informed decisions based on projected performance.

The other options present different valuation methodologies. The cost approach values a property based on the cost of replacing or reproducing it. The market value approach, often called the sales comparison approach, evaluates properties based on recent sales of similar properties in the area. Lastly, the comparative sales approach focuses on the sales prices of comparable properties to establish a value based on market activity. Each of these methods has its unique applications, but they do not incorporate income generation into their valuations like the income capitalization approach does.