Which approach is typically used for income-generating properties?

The income capitalization approach is designed specifically for evaluating income-generating properties, such as rental apartments, commercial buildings, or industrial properties. This method focuses on the income that a property can generate, allowing investors to assess its potential profitability.

In this approach, the value of the property is determined based on the present value of its expected future cash flows, typically represented as net operating income (NOI). The cap rate, or capitalization rate, is then applied to these income figures to estimate the property's value. This method is particularly useful because it takes into account the economic realities of income-producing properties, considering both revenue generation and operational costs.

In contrast to other valuation methods, such as the cost approach or the sales comparison approach, the income capitalization approach directly ties the property’s value to its performance as an investment. The cost approach relies on the cost of construction and property improvements, while the sales comparison approach looks at recent sales of similar properties. The depreciation approach, which pertains to the loss of property value over time, does not focus on income generation, making it less relevant for this specific type of property evaluation. Thus, the income capitalization approach is the most suitable and widely accepted method for analyzing income-generating properties.