What does the income approach analyze?

The income approach primarily analyzes a property's potential to generate future income, focusing on its performance as an investment rather than its physical characteristics or historical price changes. This valuation method is particularly applicable to investment properties, such as rental apartments, commercial buildings, and other income-generating real estate.

In assessing the income approach, appraisers evaluate factors such as current rental income, potential rental rates, vacancy rates, and expenses associated with managing the property. By calculating the net operating income (NOI) and applying a capitalization rate, the approach derives an estimated value based on the income that a property is expected to produce in the future.

This approach stands in contrast to other methods that might focus on a property's tax assessments, its appreciation over time, or its condition. Each of these alternatives serves a different purpose and provides different insights, but the income approach’s unique focus on future income generation makes it particularly relevant for evaluating investment opportunities in real estate.