What does the income approach to value focus on determining?

The income approach to value prioritizes the income generated from leasing or renting a property. This valuation method is notably utilized by investors looking to assess the worth of real estate based on its ability to produce revenue. It hinges on the principle that the value of an investment property is directly related to the income it can create over time, making this approach particularly applicable for rental properties and commercial real estate.

In this approach, two common methods are used: the direct capitalization method, which converts an income stream into a present value estimate, and the discounted cash flow method, which involves forecasting future income and discounting it back to the present value. By focusing on potential income, this approach allows investors to make informed decisions about property acquisitions, financing, or potential resale, based on its profitability.