What is the method of estimating property value by applying a rate of return to the net income it produces?

The method of estimating property value by applying a rate of return to the net income it produces is known as the Income Capitalization Approach. This approach is particularly relevant for income-generating properties, such as commercial real estate or rental properties, where the primary concern is the income that the property can generate.

In the Income Capitalization Approach, the estimated value of the property is determined by taking the net operating income (NOI) and dividing it by a capitalization rate (cap rate). The cap rate reflects the expected rate of return an investor would require for that type of investment, thus translating the income potential into an estimate of value. This method is highly useful for investors assessing the profitability of an income-producing property, providing them with a clear perspective on how much they should be willing to pay based on expected income.

The other methodologies, such as the Cost Approach, focus on the costs involved in creating a property or its replacement value, while the Sales Comparison Approach relies on comparing similar properties that have recently sold in the same market. The Market Value Approach is a broader term, which in many cases could overlap with the Sales Comparison Approach. However, none of these options specifically utilize the rate of return on producing income, which is the hallmark of the Income Capital