What does the income approach in property valuation rely on?

The income approach in property valuation is primarily focused on assessing the present worth of the future income benefits that a property can generate. This approach is often used for investment properties, as it evaluates the property based on its ability to produce income over time, rather than just its physical characteristics or past sales prices. The underlying principle is that the value of a property is determined by the income it can generate, which is discounted to reflect its present value.

By forecasting the income a property will generate—typically via rent—and applying a capitalization rate, appraisers can estimate the current value of the property. This method is particularly useful for commercial real estate and rental properties, where cash flow is a critical factor in determining worth.

Options focusing on market sale prices, historical costs, or replacement values emphasize other valuation methodologies that do not primarily consider potential income generation, marking a clear distinction from the income approach's focus on future cash flows.