Which real estate valuation approach focuses on potential income generation as the basis for determining value?

The income approach is specifically designed to estimate the value of a property based on its potential to generate income. This method is particularly relevant for investment properties, such as apartment buildings or commercial real estate, where the primary concern for investors is how much income the property can yield over time.

In utilizing the income approach, an appraiser typically assesses the gross income that a property can produce, subtracts operating expenses, and then applies a capitalization rate to determine the present value of future cash flows. This approach is rooted in the principle that an investor will not pay more for a property than the amount of income it can reasonably produce.

While the cost approach focuses on the cost to replace or reproduce the property, and the sales comparison approach evaluates similar, recently sold properties to establish value, the income approach uniquely prioritizes potential income, making it essential for valuing income-generating properties. Market value analysis offers a broader understanding of value but does not specifically center around income generation as the core measure of property worth.