In the income approach, what is capitalized to estimate the value of a property?

In the income approach to real estate valuation, the focus is on estimating the value of a property based on the income it generates. Specifically, the Net Operating Income (NOI) is capitalized to determine the property’s value. NOI is calculated by taking the gross income from the property and subtracting operating expenses, which results in the net income that the property generates.

The process of capitalization involves converting this income figure into a property value by applying a capitalization rate (cap rate), which reflects the expected return on investment for similar properties in the market. This method is especially pertinent for investment properties, where potential buyers or investors are primarily interested in the income-generating ability of the property rather than just its physical characteristics.

While sales price and comparable sale prices can be used in other approaches to valuation (like the sales comparison approach), they do not directly relate to the income approach. Maintenance costs, although important for operating expenses associated with NOI, are not capitalized to estimate property value. The key aspect here is that NOI serves as the basis for understanding how much income the property is expected to generate, making it the centerpiece of valuation in the income approach.