Which term is used for a method that includes calculating NOI in determining property value?

The income capitalization approach is a method used to determine property value by calculating the net operating income (NOI). This approach focuses on the income-generating potential of a property rather than just its physical characteristics or the sale prices of similar properties.

In this method, the identified NOI is capitalized to arrive at an estimate of the property’s value. The capitalization process involves determining a capitalization rate, which reflects the expected return on investment for an investor based on the property’s risk and market conditions. By applying this rate to the NOI, an investor can estimate what they would be willing to pay for the property based on its income potential.

This contrasts with other methods of property valuation. For instance, the sales comparison approach evaluates property value by comparing it to recent sale prices of similar properties in the area, focusing heavily on market-driven transactions. The cost approach estimates value based on the cost to replace the property, adjusted for depreciation. Market value analysis leans more toward a broad view of different market factors rather than a direct income-based valuation.

The income capitalization approach is particularly valuable for investment properties, where the income generated is a significant factor in determining overall value and potential return on investment. Therefore, identifying NOI and using it to calculate property value through this method is