How does income capitalization approach estimate value?

The income capitalization approach estimates value by predicting future income generated by the property. This method is based on the premise that the value of an income-producing property is directly related to the income it is expected to generate. To determine the value, appraisers typically project the potential income over a specific period and then apply a capitalization rate to convert that future income into a present value.

This approach is particularly relevant for commercial real estate or rental properties, where potential investors are primarily interested in the income stream the property can produce. By focusing on income potential, this method provides a clear picture of the property's financial viability and can guide buyers in making informed investment decisions.

In contrast, the other methods mentioned do not focus on income projections. For example, calculating construction costs pertains to replacement or reproduction cost approaches, while assessing current market values or analyzing comparable property sales relies on market conditions and transactions rather than future income expectations.