What valuation method determines property value based on the income it generates for an investor?

The income approach is the correct valuation method for determining property value based on the income it generates for an investor. This approach is particularly applicable for investment properties, such as rental apartments, commercial buildings, or other properties where income generation is a key factor in valuation.

In this method, the value of the property is calculated based on the revenue it produces, adjusted for expenses, and capitalized into a value figure, considering the potential return on investment. This involves analyzing the net operating income (NOI) of the property, factoring in typical expenses, and applying a capitalization rate that reflects the expected return for similar investments in the market. Thus, the income approach gives investors a clear understanding of a property’s financial performance and its potential value based on cash flow.

The other valuation methods serve different purposes and are geared toward different types of properties or situations. The cost approach focuses on the cost to replace the property, the sales comparison approach looks at recent sales of similar properties to determine value, and the market approach evaluates how similar properties are valued in the current market. While these methods may provide useful insights, they do not focus specifically on income generation in the same way the income approach does.