In the income capitalization approach, which type of income is most relevant?

In the income capitalization approach, the most relevant type of income is net operating income (NOI). This method evaluates a property’s ability to generate revenue based on its income-producing potential rather than just its sale price or market value.

Net operating income reflects the income generated by the property after accounting for all operating expenses. It provides a clear picture of the profitability of a property as it considers costs related to management, maintenance, property taxes, insurance, and other operating expenses. Investors and appraisers rely on NOI as it helps in assessing the actual income that a property can generate, offering a realistic representation of cash flow available for debt service and profit.

Potential gross income refers to the total income a property could generate before deducting any costs or allowances for vacancy and collection losses. While this figure is informative, it does not accurately reflect the profitability of a property in practice, as it does not account for operating expenses.

Actual cash flow involves the actual income received after all expenses, which can be valuable but is not typically used in property valuations. Future projected income relies on estimates and forecasts, which may vary significantly and can often lack the certainty needed for sound investment decisions.

Therefore, when assessing a property’s investment potential in the income capitalization approach, net operating