What is the formula for calculating value using the income capitalization approach?

The income capitalization approach is a method used in real estate valuation that focuses on the income-generating potential of a property. The formula for calculating value in this approach, which is accurately represented here, is based on the relationship between the Net Operating Income (NOI) and the capitalization rate (cap rate).

When utilizing this formula, the Net Operating Income represents the property's total income minus all necessary operating expenses, excluding financing costs and taxes. The capitalization rate is a percentage yield expected by investors on their investment in that type of property. By dividing the Net Operating Income by the capitalization rate, an investor can determine the value of the property.

This approach is particularly beneficial for investment properties, as it reflects the income produced by the property and provides a realistic assessment of its market value based on that income stream. The use of NOI divided by the capitalization rate allows potential buyers to estimate the worth of the property compared to their investment criteria and the current market conditions, making it a crucial formula in real estate investment analysis.

The other formulas listed do not accurately reflect the income capitalization approach, as they either lack the correct relationship between NOI and capitalization rate or incorporate irrelevant components such as gross income or operating expenses without proper context.