Which method is used to evaluate the value of an investment property based on its rental income?

The correct method for evaluating the value of an investment property based on its rental income is the income capitalization approach. This method focuses specifically on the income that the property generates and uses that income to estimate value. It takes the property's net operating income (NOI) and divides it by a capitalization rate (cap rate) to arrive at a valuation that reflects the potential return on investment to the property owner.

While the gross rent multiplier method, which considers the property’s gross rental income to quickly estimate its value, is a valid method, it does not provide a comprehensive analysis because it does not take into account operating expenses or net income. In contrast, the income capitalization approach gives a clearer picture of the property's worth by factoring in these crucial elements.

Moreover, the market comparison approach evaluates property values by comparing similar properties that have recently sold, while the total cost approach assesses value based on the cost to replace or reproduce the property. None of these methods are specifically focused on the rental income aspect in the same way that the income capitalization approach is, which makes it the most appropriate choice for evaluating investment properties based on their ability to generate income.